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Dynamic Factor Models and Fractional Integration—With an Application to US Real Economic Activity

Author

Listed:
  • Guglielmo Maria Caporale

    (Department of Economics and Finance, Brunel University of London, Kingston Lane, Uxbridge UB8 3PH, UK)

  • Luis Alberiko Gil-Alana

    (Facultad de Derecho, Empresa y Gobierno, Universidad Francisco de Vitoria, 28223 Madrid, Spain
    Faculty of Economics and NCID, University of Navarra, 31080 Pamplona, Spain)

  • Pedro Jose Piqueras Martinez

    (Faculty of Economics and NCID, University of Navarra, 31080 Pamplona, Spain)

Abstract

This paper makes a twofold contribution. First, it develops the dynamic factor model of by allowing for fractional integration instead of imposing the classical dichotomy between I (0) stationary and I (1) non-stationary series. This more general setup provides valuable information on the degree of persistence and mean-reverting properties of the series. Second, the proposed framework is used to analyse five annual US Real Economic Activity series (Employees, Energy, Industrial Production, Manufacturing, Personal Income) over the period from 1967 to 2019 in order to shed light on their degree of persistence and cyclical behaviour. The results indicate that economic activity in the US is highly persistent and is also characterised by cycles with a periodicity of 6 years and 8 months.

Suggested Citation

  • Guglielmo Maria Caporale & Luis Alberiko Gil-Alana & Pedro Jose Piqueras Martinez, 2024. "Dynamic Factor Models and Fractional Integration—With an Application to US Real Economic Activity," Econometrics, MDPI, vol. 12(4), pages 1-14, December.
    • Handle: RePEc:gam:jecnmx:v:12:y:2024:i:4:p:39-:d:1547771
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    More about this item

    Keywords

    fractional integration; dynamic factor models; persistence; business cycle; economic activity; Kalman filter; state-space models;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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