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An Overview of the Factor-augmented Error-Correction Model

Anindya Banerjee (), Massimiliano Marcellino and Igor Masten

A chapter in Dynamic Factor Models, 2016, vol. 35, pp 3-41 from Emerald Publishing Ltd

Abstract: Abstract The Factor-augmented Error-Correction Model (FECM) generalizes the factor-augmented VAR (FAVAR) and the Error-Correction Model (ECM), combining error-correction, cointegration and dynamic factor models. It uses a larger set of variables compared to the ECM and incorporates the long-run information lacking from the FAVAR because of the latter’s specification in differences. In this paper, we review the specification and estimation of the FECM, and illustrate its use for forecasting and structural analysis by means of empirical applications based on Euro Area and US data.

Keywords: Dynamic factor models; cointegration; structural analysis; factor-augmented error correction models; FAVAR; C32; E17 (search for similar items in EconPapers)
Date: 2016
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