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Fast ML estimation of dynamic bifactor models: an application to European inflation

Author

Listed:
  • Gabriele Fiorentini

    (UNIVERSITÀ DI FIRENZE AND RCEA)

  • Alessandro Galesi

    (Banco de España)

  • Enrique Sentana

    (CEMFI)

Abstract

We generalise the spectral EM algorithm for dynamic factor models in Fiorentini, Galesi and Sentana (2014) to bifactor models with pervasive global factors complemented by regional ones. We exploit the sparsity of the loading matrices so that researchers can estimate those models by maximum likelihood with numerous series from multiple regions. We also derive convenient expressions for the spectral scores and information matrix, which allows us to switch to the scoring algorithm near the optimum. We explore the ability of a model with one global factor and three regional factors to capture inflation dynamics across 25 European countries in the period 1999-2014.

Suggested Citation

  • Gabriele Fiorentini & Alessandro Galesi & Enrique Sentana, 2015. "Fast ML estimation of dynamic bifactor models: an application to European inflation," Working Papers 1525, Banco de España.
    • Handle: RePEc:bde:wpaper:1525
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    References listed on IDEAS

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    1. Gabriele Fiorentini & Enrique Sentana & Neil Shephard, 2004. "Likelihood-Based Estimation of Latent Generalized ARCH Structures," Econometrica, Econometric Society, vol. 72(5), pages 1481-1517, September.
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    1. Fiorentini, Gabriele & Galesi, Alessandro & Sentana, Enrique, 2018. "A spectral EM algorithm for dynamic factor models," Journal of Econometrics, Elsevier, vol. 205(1), pages 249-279.
    2. Gabriele Fiorentini & Enrique Sentana, 2019. "Dynamic specification tests for dynamic factor models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(3), pages 325-346, April.

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    More about this item

    Keywords

    euro area; inflation convergence; spectral maximum likelihood; Wiener-Kolmogorov filter.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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