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OPENING THE BLACK BOX: STRUCTURAL FACTOR MODELS WITH LARGE CROSS SECTIONS

Published online by Cambridge University Press:  01 October 2009

Mario Forni ,
Domenico Giannone ,
Marco Lippi  and
Lucrezia Reichlin
Mario Forni
Affiliation:
Università di Modena e Reggio Emilia and CEPR
Domenico Giannone
Affiliation:
ECARES, Université Libre de Bruxelles
Marco Lippi*
Affiliation:
Università di Roma “La Sapienza”
Lucrezia Reichlin
Affiliation:
European Central Bank ECARES, Université Libre de Bruxelles and CEPR
*
*Address correspondence to Marco Lippi, Dipartimento di Economia, Via Cesalpino 12, I-00161 Roma, Italy; e-mail: ml@lippi.ws.
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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.

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Type
ARTICLES
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Econometric Theory , Volume 25 , Issue 5 , October 2009 , pp. 1319 - 1347
Copyright
Copyright © Cambridge University Press 2009

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