Working Paper: NBER ID: w11467
Authors: James H. Stock; Mark W. Watson
Abstract: This paper considers VAR models incorporating many time series that interact through a few dynamic factors. Several econometric issues are addressed including estimation of the number of dynamic factors and tests for the factor restrictions imposed on the VAR. Structural VAR identification based on timing restrictions, long run restrictions, and restrictions on factor loadings are discussed and practical computational methods suggested. Empirical analysis using U.S. data suggest several (7) dynamic factors, rejection of the exact dynamic factor model but support for an approximate factor model, and sensible results for a SVAR that identifies money policy shocks using timing restrictions.
Keywords: Dynamic Factor Models; VAR Analysis; Structural VAR; Macroeconomics
JEL Codes: C32; E17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| many implications of the DFM for the full 132-variable VAR are rejected (C22) | coefficients that are statistically significantly different from zero but economically trivial (C20) |
| number of dynamic factors present in the dataset (C39) | estimated to be seven (C13) |
| structural FAVAR methods illustrate reexamining the BBE identification scheme (C51) | results consistent with standard macroeconomic theory (E19) |
| structural FAVAR methods illustrate reexamining the BBE identification scheme (C51) | identifying specific failures in the BBE assumptions (D80) |