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Empirical identification of factor models

Author

Listed:
  • Piyachart Phiromswad

    () (Sasin Graduate Institute of Business Administration of Chulalongkorn University)

  • Takeshi Yagihashi

    () (Old Dominion University)

Abstract

Abstract In the conventional factor-augmented vector autoregression (FAVAR), the extracted factors cannot be used in structural analysis because the factors do not retain a clear economic interpretation. This paper proposes a new method to identify macroeconomic factors, which is associated with better economic interpretations. Using an empirical-based search algorithm, we select variables that are individually caused by a single factor. These variables are then used to impose restrictions on the factor loading matrix, and we obtain an economic interpretation for each factor. We apply our method to time-series data in the USA and further conduct a monetary policy analysis. Our method yields stronger responses of price variables and muted responses of output variables than what the literature has found.

Suggested Citation

  • Piyachart Phiromswad & Takeshi Yagihashi, 2016. "Empirical identification of factor models," Empirical Economics, Springer, vol. 51(2), pages 621-658, September.
  • Handle: RePEc:spr:empeco:v:51:y:2016:i:2:d:10.1007_s00181-015-1025-9
    DOI: 10.1007/s00181-015-1025-9
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    References listed on IDEAS

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    Keywords

    Monetary policy; Causal search; FAVAR; PC algorithm;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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