Factor analysis in a New-Keynesian model

Andreas Beyer (), Roger E. A. Farmer (), Jerome Henry () and Massimiliano Marcellino

No 510, Working Paper Series from European Central Bank

Abstract: New-Keynesian 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 of identification of the parameters, misspecifi- cation 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 validity of commonly used instruments to achieve identification. In this paper we analyze the practical relevance of these problems and we propose remedies to weak identifi- cation based on recent developments in factor analysis for information extraction from large data sets. Using these techniques, we evaluate the robustness of recent findings on the importance of forward looking components in the equations of the New-Keynesian model.

Keywords: New-Keynesian Phillips curve; forward looking output equation; Taylor rule; rational expectations; factor analysis; determinacy of equilibrium. (search for similar items in EconPapers)
JEL-codes: E5 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-mac
Date: 2005-08
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Working Paper: Factor Analysis in a New-Keynesian Model (2005)
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