Identification of Macroeconomic Factors in Large Panels
CREATES Research Paper No. 2009-43
45 Pages Posted: 1 Oct 2009
Date Written: September 30, 2009
This paper presents a dynamic factor model in which 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 nine macroeconomic factors and discuss the economic impact of monetary policy stocks. The results are theoretically plausible and in line with other findings in the literature.
Keywords: Monetary policy, Business Cycles, Factor Models, EM Algorithm
JEL Classification: E3, E43, C51, E52, C33
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