Opening the Black Box: The Econometrics of Structural Factor Models

Reichlin, L., Giannone, D., Forni, M., Lippi, M.
Date Published: 2009

Abstract:
This paper shows how large-dimensional dynamic factor models are suitable for structural analysis. We argue that all identification schemes employed in structural vector Autoregression (SVAR) analysis can be easily adapted in dynamic factor models. Moreover, the “problem of fundamentalness,” which is intractable in SVARs, can be solved, provided that the impulse-response functions are sufficiently heterogeneous.We provide consistent estimators for the impulse-response functions and for (n,T ) rates of convergence. An exercise with U.S. macroeconomic data shows that our solution of the fundamentalness problem may have important empirical consequences.

Citation:
Reichlin, L., Giannone, D., Forni, M., Lippi, M., "Opening the Black Box: The Econometrics of Structural Factor Models", Econometric Theory, 2009

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