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Opening the Black Box: Structural Factor Models with Large Cross-Sections

Listed author(s):
  • Mario Forni

    ()

  • Domenico Giannone
  • Marco Lippi
  • Lucrezia Reichlin

This paper shows how large-dimensional dynamic factor models are suitable for structural analysis. We argue that all identification schemes employed in SVAR analysis can be easily adapted in dynamic factor models. Moreover, the “problem of fundamentalness”, which is intractable in structural VARs, can be solved, provided that the impulse-response functions are sufficiently heterogeneous. We provide consistent stimators for the impulse-response functions, as well as (n, T) rates of convergence. An exercise with US macroeconomic data shows that our solution of the fundamentalness problem may have important empirical consequences.

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File URL: http://www.recent.unimore.it/wp/RECent-wp8.pdf
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Paper provided by University of Modena and Reggio E., Dept. of Economics "Marco Biagi" in its series Center for Economic Research (RECent) with number 008.

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Length: pages 39
Date of creation: Nov 2007
Handle: RePEc:mod:recent:008
Contact details of provider: Web page: http://www.recent.unimore.it/

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  16. Giannone, Domenico & Reichlin, Lucrezia & Sala, Luca, 2006. "VARs, common factors and the empirical validation of equilibrium business cycle models," Journal of Econometrics, Elsevier, vol. 132(1), pages 257-279, May.
  17. Bai, Jushan & Ng, Serena, 2007. "Determining the Number of Primitive Shocks in Factor Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 52-60, January.
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  22. Giannone, Domenico & Reichlin, Lucrezia, 2006. "Does Information Help Recovering Structural Shocks from Past Observations?," CEPR Discussion Papers 5725, C.E.P.R. Discussion Papers.
  23. Marco Lippi & Lucrezia Reichlin, 1994. "VAR analysis, non-fundamental representations, Blashke matrices," ULB Institutional Repository 2013/10151, ULB -- Universite Libre de Bruxelles.
  24. Altug, Sumru, 1989. "Time-to-Build and Aggregate Fluctuations: Some New Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 889-920, November.
  25. Blanchard, Olivier Jean & Quah, Danny, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Reply," American Economic Review, American Economic Association, vol. 83(3), pages 653-658, June.
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  29. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2005. "A critique of structural VARs using real business cycle theory," Working Papers 631, Federal Reserve Bank of Minneapolis.
  30. Mario Forni & Lucrezia Reichlin, 1998. "Let's Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 453-473.
  31. Forni, Mario & Lippi, Marco, 2000. "The Generalized Dynamic Factor Model: Representation Theory," CEPR Discussion Papers 2509, C.E.P.R. Discussion Papers.
  32. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
  33. Gamber, Edward N & Joutz, Frederick L, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(5), pages 1387-1393, December.
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