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Identification of Macroeconomic Factors in Large Panels

  • Romain Houssa

    ()

    (Center for Research in the Economics of Development, University of Namur)

  • Lasse Bork

    (Aarhus School of Business, University of Aarhus and CREATES at the University of Aarhus)

  • Hans Dewachter

    (CES, University of Leuven, RSM Rotterdam and CESIFO.)

This paper presents a dynamic factor model where the extracted factors and shocks are given a clear economic interpretation. The economic interpretation of the factors is obtained by means of a set of over-identifying loading restrictions, while the structural shocks are estimated following standard practices in the SVAR literature. Estimators based on the EM algorithm are developed. We apply this framework to a large panel of US monthly macroeconomic series. In particular, we identify five macroeconomic factors and discuss the economic impact of monetary policy shocks. The results are theoretically more plausible than those implied by standard SVAR models and indicate a significant role for monetary policy shocks in macroeconomic dynamics.

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File URL: http://www.fundp.ac.be/eco/economie/recherche/wpseries/wp/1010.pdf
File Function: First version, 2008
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Paper provided by University of Namur, Department of Economics in its series Working Papers with number 1010.

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Length: 42 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:nam:wpaper:1010
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  11. Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005. "Monetary Policy in Real Time," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 161-224 National Bureau of Economic Research, Inc.
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  16. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2003. "The Generalized Dynamic Factor Model. One-Sided Estimation and Forecasting," LEM Papers Series 2003/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  17. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
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  24. Sydney Ludvigson & Serena Ng, 2006. "The Empirical Risk-Return Relation: a factor analysis approach," 2006 Meeting Papers 236, Society for Economic Dynamics.
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