Fast ML Estimation of Dynamic Bifactor Models: An Application to European Inflation

64 Pages Posted: 22 Sep 2015

See all articles by Gabriele Fiorentini

Gabriele Fiorentini

Universita di Firenze - Dipartimento di Statistica

Alessandro Galesi

Banco de España

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 22, 2015

Abstract

We generalise the spectral EM algorithm for dynamic factor models in Fiorentini, Galesi and Sentana (2014) to bifactor models with pervasive global factors complemented by regional ones. We exploit the sparsity of the loading matrices so that researchers can estimate those models by maximum likelihood with numerous series from multiple regions. We also derive convenient expressions for the spectral scores and information matrix, which allows us to switch to the scoring algorithm near the optimum. We explore the ability of a model with one global factor and three regional factors to capture inflation dynamics across 25 European countries in the period 1999-2014.

Keywords: Euro area, inflation convergence, spectral maximum likelihood, Wiener-Kolmogorov filter

JEL Classification: C32, C38, E37, F45

Suggested Citation

Fiorentini, Gabriele and Galesi, Alessandro and Sentana, Enrique, Fast ML Estimation of Dynamic Bifactor Models: An Application to European Inflation (September 22, 2015). Banco de Espana Working Paper No. 1525. Available at SSRN: https://ssrn.com/abstract=2663951 or http://dx.doi.org/10.2139/ssrn.2663951

Gabriele Fiorentini (Contact Author)

Universita di Firenze - Dipartimento di Statistica ( email )

Viale Morgagni, 59
50134 Firenze
Italy
+39 055 4237 274 (Phone)
+39 055 4223 560 (Fax)

Alessandro Galesi

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~sentana/

Financial Markets Group

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London School of Economics & Political Science (LSE)
London WC2A 2AE
United Kingdom
+44 20 7955 7002 (Phone)
+44 20 7852 3580 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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