Instrumented Principal Component Analysis
33 Pages Posted: 9 Jun 2017 Last revised: 11 Jun 2017
Date Written: June 9, 2017
We propose a method of factor estimation for a data panel Y by using the data tensor Z to parameterize loadings --- Instrumented Principal Component Analysis. IPCA allows us to identify a model wherein factor loadings vary over both panel dimensions, which is an implication of various economic theories. Our benchmark estimator is computed virtually instantaneously using the singular value decomposition --- we show the consistency and asymptotic distribution for resulting estimates. An application to international macroeconomics suggests that a nation's import share, gross capital formation share, and overall level of GDP drive its relationship to a global growth factor, whereas population density does not.
Keywords: factor model, principal components, tensor, asymptotic theory, international macroeconomics, dynamic loading
JEL Classification: F44, C55
Suggested Citation: Suggested Citation