The Generalized Dynamic Factor Model: Identification and Estimation
This paper analyzes identification conditions, and proposes an estimator, for a dynamic factor model where the idiosyncratic components are allowed to be mutually non-orthogonal. This model, which we call the generalized dynamic factor model, is novel to the literature, and generalizes the static approximate factor model of Chamberlain and Rothschild (1983), as well as the exact factor model à la Sargent and Sims (1977). We propose an estimator of the common components and prove convergence as both time and cross-sectional size go to infinity at appropriate rates. Simulations yield encouraging results in small samples. We use our model to construct an index of the state of the economy for the European currency area. Such an index is defined as the common component of real GDP within a model including several macroeconomic variables for each European country.
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- Mario Forni & Lucrezia Reichlin, 1996.
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"Let's Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics,"
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- Mario Forni & Lucrezia Reichlin, 1998. "Let's get real: a factor analytical approach to disaggregated business cycle dynamics," ULB Institutional Repository 2013/10147, ULB -- Universite Libre de Bruxelles.
- Chamberlain, Gary, 1983. "Funds, Factors, and Diversification in Arbitrage Pricing Models," Econometrica, Econometric Society, vol. 51(5), pages 1305-1323, September.
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ULB Institutional Repository
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- Forni, Mario & Reichlin, Lucrezia, 1997. "National Policies and Local Economies: Europe and the United States," CEPR Discussion Papers 1632, C.E.P.R. Discussion Papers.
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