Interpreting the latent dynamic factors by threshold FAVAR model

Sinem Hacioglu Hoke and Kerem Tuzcuoglu

No 622, Bank of England working papers from Bank of England

Abstract: This paper proposes a method to interpret factors which are otherwise difficult to assign economic meaning to by utilizing a threshold factor-augmented vector autoregression (FAVAR) model. We observe the frequency of the factor loadings being induced to zero when they fall below the estimated threshold to infer the economic relevance that the factors carry. The results indicate that we can link the factors to particular economic activities, such as real activity, unemployment, without any prior specification on the data set. By exploiting the flexibility of FAVAR models in structural analysis, we examine impulse response functions of the factors and individual variables to a monetary policy shock. The results suggest that the proposed method provides a useful framework for the interpretation of factors and associated shock transmission.

Keywords: Factor models; FAVAR; latent threshold; MCMC; interpretation of latent factors; shrinkage estimation (search for similar items in EconPapers)
JEL-codes: C11 C31 C51 C55 E50 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-10-07
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0622

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