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Interpreting the latent dynamic factors by threshold FAVAR model

Author

Listed:
  • Hacioglu, Sinem

    (Bank of England)

  • Tuzcuoglu, Kerem

    (Columbia University, Department of Economics)

Abstract

This paper proposes a method to interpret factors which are otherwise difficult to assign economic meaning to by utilizing a threshold factor-augmented vector autoregression (FAVAR) model. We observe the frequency of the factor loadings being induced to zero when they fall below the estimated threshold to infer the economic relevance that the factors carry. The results indicate that we can link the factors to particular economic activities, such as real activity, unemployment, without any prior specification on the data set. By exploiting the flexibility of FAVAR models in structural analysis, we examine impulse response functions of the factors and individual variables to a monetary policy shock. The results suggest that the proposed method provides a useful framework for the interpretation of factors and associated shock transmission.

Suggested Citation

  • Hacioglu, Sinem & Tuzcuoglu, Kerem, 2016. "Interpreting the latent dynamic factors by threshold FAVAR model," Bank of England working papers 622, Bank of England.
    • Handle: RePEc:boe:boeewp:0622
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    References listed on IDEAS

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    Cited by:

    1. Di Iorio, Francesca & Fachin, Stefano, 2021. "Evaluating restricted common factor models for non-stationary data," Econometrics and Statistics, Elsevier, vol. 17(C), pages 64-75.
    2. Martin Hodula & Lukas Pfeifer, 2018. "The Impact of Credit Booms and Economic Policy on Labour Productivity: A Sectoral Analysis," ACTA VSFS, University of Finance and Administration, vol. 12(1), pages 10-42.
    3. Hodula Martin & Pfeifer Lukáš, 2018. "Fiscal-Monetary-Financial Stability Interactions in a Data-Rich Environment," Review of Economic Perspectives, Sciendo, vol. 18(3), pages 195-224, September.
    4. Elena Pelinescu & Mihaela Simionescu, 2017. "The Effects of the Recent Economic and Financial Crisis on the Romanian Economy," Working papers Globalization - Economic, Social and Moral Implications, April 2017 15, Research Association for Interdisciplinary Studies.

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    More about this item

    Keywords

    Factor models; FAVAR; latent threshold; MCMC; interpretation of latent factors; shrinkage estimation;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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