Determining the number of global and country-specific factors in the euro area

Dias Francisco, Maximiano Pinheiro and António Rua
Additional contact information
Dias Francisco: Economics Research Department, Banco de Portugal, Lisboa, Portugal

Studies in Nonlinear Dynamics & Econometrics, 2013, vol. 17, issue 5, 573-617

Abstract: With the adoption of a single currency and a common monetary policy, the assessment of the existence of common macroeconomic factors driving the euro area as a whole is of key importance. In this paper, we try to contribute to this debate by admitting an approximate factor model with a common component comprising global and country-specific factors. Although it is arguable to allow for common factors shared by all the euro area member countries in the context of the European economic integration, it is also reasonable to admit that there may be country-specific factors. Hence, we end up with a two-level factor model allowing for both global and country-specific factors. We discuss the consistency of the principal components estimator within such framework and propose criteria for determining the number of global and group-specific factors. The consistency of the suggested criteria is established and the small sample properties are assessed through Monte Carlo simulations. Resorting to large datasets for the four major euro area countries, we find evidence of the existence of both global and country-specific factors.

Keywords: euro area; factor models; global factors; group-specific factors; model selection criteria.; JEL classification: C32; C52 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://doi.org/10.1515/snde-2012-0031 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:sndecm:v:17:y:2013:i:5:p:573-617:n:3

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/snde/html

DOI: 10.1515/snde-2012-0031

Access Statistics for this article

Studies in Nonlinear Dynamics & Econometrics is currently edited by Bruce Mizrach

More articles in Studies in Nonlinear Dynamics & Econometrics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().