The Generalized Dynamic-Factor Model: Identification And Estimation

Mario Forni, Marc Hallin, Marco Lippi and Lucrezia Reichlin

The Review of Economics and Statistics, 2000, vol. 82, issue 4, 540-554

Abstract: This paper proposes a factor model with infinite dynamics and nonorthogonal idiosyncratic components. The model, which we call the generalized dynamic-factor model, is novel to the literature and generalizes the static approximate factor model of Chamberlain and Rothschild (1983), as well as the exact factor model à la Sargent and Sims (1977). We provide identification conditions, propose an estimator of the common components, prove convergence as both time and cross-sectional size go to infinity at appropriate rates, and present simulation results. We use our model to construct a coincident index for the European Union. Such index is defined as the common component of real GDP within a model including several macroeconomic variables for each European country. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Date: 2000
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Working Paper: The generalised dynamic factor model: identification and estimation (2000)
Working Paper: The Generalized Dynamic Factor Model: Identification and Estimation (1999)
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