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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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