Non-Stationary Dynamic Factor Models for Large Datasets
59 Pages Posted: 4 Mar 2016
Date Written: March 3, 2016
We develop the econometric theory for Non-Stationary Dynamic Factor models for large panels of time series, with a particular focus on building estimators of impulse response functions to unexpected macroeconomic shocks. We derive conditions for consistent estimation of the model as both the cross-sectional size, n, and the time dimension, T, go to infinity, and whether or not cointegration is imposed. We also propose a new estimator for the non-stationary common factors, as well as an information criterion to determine the number of common trends. Finally, the numerical properties of our estimator are explored by means of a MonteCarlo exercise and of a real-data application, in which we study the effects of monetary policy and supply shocks on the US economy.
Keywords: Dynamic Factor models, unit root processes, common trends, impulse response functions
JEL Classification: C0, C01, E0
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