Factor Analysis in a Model with Rational Expectations

Andreas Beyer (), Roger Farmer, Jérôme Henry and Massimiliano Marcellino

No 13404, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: DSGE models are characterized by the presence of expectations as explanatory variables. To use these models for policy evaluation, the econometrician must estimate the parameters of expectation terms. Standard estimation methods have several drawbacks, including possible lack or weakness of identification of the parameters, misspecification of the model due to omitted variables or parameter instability, and the common use of inefficient estimation methods. Several authors have raised concerns over the implications of using inappropriate instruments to achieve identification. In this paper we analyze the practical relevance of these problems and we propose to combine factor analysis for information extraction from large data sets and GMM to estimate the parameters of systems of forward looking equations. Using these techniques, we evaluate the robustness of recent findings on the importance of forward looking components in the equations of a standard New-Keynesian model.

JEL-codes: E5 E52 E58 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ecm and nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (6)

Published as Andreas Beyer & Roger E. A. Farmer & Jérôme Henry & Massimiliano Marcellino, 2008. "Factor analysis in a model with rational expectations," Econometrics Journal, Royal Economic Society, vol. 11(2), pages 271-286, 07.

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