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Opening the black box: structural factor models with large cross-sections

Mario Forni (), Domenico Giannone (), Marco Lippi () and Lucrezia Reichlin ()

No 712, Working Paper Series from European Central Bank

Abstract: This paper shows how large-dimensional dynamic factor models are suitable for structural analysis. We establish sufficient conditions for identification of the structural shocks and the associated impulse response functions. In particular, we argue that, if the data follow an approximate factor structure, the “problem of fundamentalness”, which is intractable in structural VARs, can be solved provided that the impulse responses are sufficiently heterogeneous. Finally, we propose a consistent method (and n, T rates of convergence) to estimate the impulse-response functions, as well as a bootstrapping procedure for statistical inference. JEL Classification: E0, C1

Keywords: Dynamic Factor Models; fundamentalness; Identification; structural VARs (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2007-01
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Related works:
Journal Article: OPENING THE BLACK BOX: STRUCTURAL FACTOR MODELS WITH LARGE CROSS SECTIONS (2009) Downloads
Working Paper: Opening the Black Box: Structural Factor Models with Large Cross-Sections (2008) Downloads
Working Paper: Opening the Black Box: Structural Factor Models with Large Cross-Sections (2007) Downloads
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