Latent Variables Analysis in Structural Models: A New Decomposition of the Kalman Smoother

38 Pages Posted: 7 Dec 2020

See all articles by Hess T. Chung

Hess T. Chung

Board of Governors of the Federal Reserve System

Cristina Fuentes-Albero

Board of Governors of the Federal Reserve System

Matthias O. Paustian

Board of Governors of the Federal Reserve System

Damjan Pfajfar

Board of Governors of the Federal Reserve System

Date Written: December, 2020

Abstract

This paper advocates chaining the decomposition of shocks into contributions from forecast errors to the shock decomposition of the latent vector to better understand model inference about latent variables. Such a double decomposition allows us to gauge the inuence of data on latent variables, like the data decomposition. However, by taking into account the transmission mechanisms of each type of shock, we can highlight the economic structure underlying the relationship between the data and the latent variables. We demonstrate the usefulness of this approach by detailing the role of observable variables in estimating the output gap in two models.

JEL Classification: C18, C32, C52

Suggested Citation

Chung, Hess T. and Fuentes-Albero, Cristina and Paustian, Matthias O. and Pfajfar, Damjan, Latent Variables Analysis in Structural Models: A New Decomposition of the Kalman Smoother (December, 2020). FEDS Working Paper No. 2020-100, Available at SSRN: https://ssrn.com/abstract=3743338 or http://dx.doi.org/10.17016/FEDS.2020.100

Hess T. Chung (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(20) 973-7484 (Phone)

Cristina Fuentes-Albero

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-973-6971 (Phone)

HOME PAGE: http://https://sites.google.com/site/cristinafuentesalbero/

Matthias O. Paustian

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Damjan Pfajfar

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
12
Abstract Views
105
PlumX Metrics