Working Paper: CEPR ID: DP17281
Authors: Marco Avarucci; Maddalena Cavicchioli; Mario Forni; Paolo Zaffaroni
Abstract: We introduce a consistent estimator for the number of shocks driving dynamic macroeconomic models that can be written as large factor models. Our estimator can be applied to single frequencies as well as to specific frequency bands, making it suitable for disentangling shocks affecting the macroeconomy. Its small-sample performance in simulations is excellent, even in estimating the number of shocks that drive DSGE models. Based on the FRED-QD dataset, we find that the U.S. macroeconomy is driven by two shocks: an inflationary demand shock and a deflationary supply shock. The demand shock is the most important.
Keywords: Number of dynamic factors; Frequency bands; Business cycle; Permanent component; Generalized dynamic factor models; DSGE
JEL Codes: C01; C13; C38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflationary demand shock (E31) | GDP growth (O49) |
| Inflationary demand shock (E31) | Inflation changes (E31) |
| Deflationary supply shock (E31) | GDP growth (O49) |
| Deflationary supply shock (E31) | Inflation changes (E31) |
| Inflationary demand shock (E31) | Cyclical fluctuations (E32) |
| Deflationary supply shock (E31) | Long-run estimators of real activity variables (C51) |
| Inflationary demand shock (E31) | Variance in major macroeconomic variables (E39) |
| Deflationary supply shock (E31) | Variance in major macroeconomic variables (E39) |