VARs, Common Factors and the Empirical Validation of Equilibrium Business Cycle Models
Federal Reserve Banks - Federal Reserve Bank of New York; Centre for Economic Policy Research (CEPR); LUISS Guido Carli University
London Business School; Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR); European Central Bank (ECB)
University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)
CEPR Discussion Paper No. 3701
Equilibrium business cycle models have typically less shocks than variables. As pointed out by Altug, 1989, and Sargent, 1989, if variables are measured with error, this characteristic implies that the model solution for measured variables has a factor structure. This Paper compares estimation performance for the impulse response coefficients based on a VAR approximation to this class of models and an estimation method that explicitly takes into account the restrictions implied by the factor structure. Bias and mean squared error for both factor based and VAR based estimates of impulse response functions are quantified using, as a data generating process, a calibrated standard equilibrium business cycle model. We show that, at short horizons, VAR estimates of impulse response functions are less accurate than factor estimates while the two methods perform similarly at medium and long run horizons.
Number of Pages in PDF File: 28
Keywords: Dynamic factor models, structural VARs, identification, equilibrium business cycle models
JEL Classification: C33, C52, E32
Date posted: February 5, 2003
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollobot1 in 0.438 seconds