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Empirical identification of factor models

Piyachart Phiromswad () and Takeshi Yagihashi ()
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Piyachart Phiromswad: Sasin Graduate Institute of Business Administration of Chulalongkorn University

Empirical Economics, 2016, vol. 51, issue 2, No 7, 658 pages

Abstract: Abstract In the conventional factor-augmented vector autoregression (FAVAR), the extracted factors cannot be used in structural analysis because the factors do not retain a clear economic interpretation. This paper proposes a new method to identify macroeconomic factors, which is associated with better economic interpretations. Using an empirical-based search algorithm, we select variables that are individually caused by a single factor. These variables are then used to impose restrictions on the factor loading matrix, and we obtain an economic interpretation for each factor. We apply our method to time-series data in the USA and further conduct a monetary policy analysis. Our method yields stronger responses of price variables and muted responses of output variables than what the literature has found.

Keywords: Monetary policy; Causal search; FAVAR; PC algorithm (search for similar items in EconPapers)
JEL-codes: C30 C32 C51 E58 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s00181-015-1025-9

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