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Factor analysis in a model with rational expectations

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Author Info
Andreas Beyer
Roger E. A. Farmer
Jérôme Henry
Massimiliano Marcellino

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Abstract

DSGE models are characterized by the presence of expectations as explanatory variables. To use these models for policy evaluation, the econometrician must estimate the parameters of expectation terms. Standard estimation methods have several drawbacks, including possible lack or weakness of identification of the parameters, misspecification of the model due to omitted variables or parameter instability, and the common use of inefficient estimation methods. Several authors have raised concerns over the implications of using inappropriate instruments to achieve identification. In this paper, we analyze the practical relevance of these problems and we propose to combine factor analysis for information extraction from large data sets and generalized method of moment to estimate the parameters of systems of forward-looking equations. Using these techniques, we evaluate the robustness of recent findings on the importance of forward-looking components in the equations of a standard New-Keynesian model. Copyright © 2008 The Author(s). Journal compilation © Royal Economic Society 2008

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1368-423X.2008.00245.x
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Publisher Info
Article provided by Royal Economic Society in its journal Econometrics Journal.

Volume (Year): 11 (2008)
Issue (Month): 2 (07)
Pages: 271-286
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Handle: RePEc:ect:emjrnl:v:11:y:2008:i:2:p:271-286

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  4. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 525-546, April. [Downloadable!] (restricted)
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  5. Fabio Canova & Luca Sala, 2005. "Back to square one: identification issues in DSGE models," Economics Working Papers 927, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2006. [Downloadable!]
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  6. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December. [Downloadable!] (restricted)
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  8. Martin Fukac & Adrian Pagan, 2006. "Limited Information Estimation and Evaluation of DSGE Models. Working paper #6," NCER Working Paper Series 6, National Centre for Econometric Research. [Downloadable!]
  9. Andreas Beyer & Roger E. A. Farmer & Jérôme Henry & Massimiliano Marcellino, 2005. "Factor analysis in a New-Keynesian model," Working Paper Series 510, European Central Bank. [Downloadable!]
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  10. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Peter N. Ireland, 2000. "Sticky-Price Models of the Business Cycle: Specification and Stability," NBER Working Papers 7511, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Gunnar Bardsen & Eilev S. Jansen & Ragnar Nymoen, 2004. "Econometric Evaluation of the New Keynesian Phillips Curve," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(s1), pages 671-686, 09. [Downloadable!] (restricted)
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  16. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  17. Massimiliano Marcellino & Carlo A. Favero & Francesca Neglia, 2005. "Principal components at work: the empirical analysis of monetary policy with large data sets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(5), pages 603-620. [Downloadable!]
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  25. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  26. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June. [Downloadable!] (restricted)
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  27. Linde, Jesper, 2005. "Estimating New-Keynesian Phillips curves: A full information maximum likelihood approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1135-1149, September. [Downloadable!] (restricted)
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  28. Sophocles Mavroeidis, 2006. "Testing the New Keynesian Phillips Curve Without Assuming Identification," Working Papers 2006-13, Brown University, Department of Economics. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stephane Dees & M. Hashem Pesaran & L. Vanessa Smith & Ron P. Smith, 2008. "Identification of New Keynesian Phillips Curves from a Global Perspective," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  2. Rolf Scheufele, 2008. "Evaluating the German (New Keynesian) Phillips Curve," IWH Discussion Papers 10-08, Halle Institute for Economic Research. [Downloadable!]
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