Dynamic Factor Models and Fractional Integration—With an Application to US Real Economic Activity

Guglielmo Maria Caporale, Luis Gil-Alana and Pedro Jose Piqueras Martinez
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Pedro Jose Piqueras Martinez: Faculty of Economics and NCID, University of Navarra, 31080 Pamplona, Spain

Econometrics, 2024, vol. 12, issue 4, 1-14

Abstract: This paper makes a twofold contribution. First, it develops the dynamic factor model of by allowing for fractional integration instead of imposing the classical dichotomy between I (0) stationary and I (1) non-stationary series. This more general setup provides valuable information on the degree of persistence and mean-reverting properties of the series. Second, the proposed framework is used to analyse five annual US Real Economic Activity series (Employees, Energy, Industrial Production, Manufacturing, Personal Income) over the period from 1967 to 2019 in order to shed light on their degree of persistence and cyclical behaviour. The results indicate that economic activity in the US is highly persistent and is also characterised by cycles with a periodicity of 6 years and 8 months.

Keywords: fractional integration; dynamic factor models; persistence; business cycle; economic activity; Kalman filter; state-space models (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Dynamic Factor Models and Fractional Integration – With an Application to US Real Economic Activity (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jecnmx:v:12:y:2024:i:4:p:39-:d:1547771

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