EconPapers    
Economics at your fingertips  
 

Factor-augmented Error Correction Models

Anindya Banerjee () and Massimiliano Marcellino

No 6707, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper brings together several important strands of the econometrics literature: error-correction, cointegration and dynamic factor models. It introduces the Factor-augmented Error Correction Model (FECM), where the factors estimated from a large set of variables in levels are jointly modelled with a few key economic variables of interest. With respect to the standard ECM, the FECM protects, at least in part, from omitted variable bias and the dependence of cointegration analysis on the specific limited set of variables under analysis. It may also be in some cases a refinement of the standard Dynamic Factor Model (DFM), since it allows us to include the error correction terms into the equations, and by allowing for cointegration prevent the errors from being non-invertible moving average processes. In addition, the FECM is a natural generalization of factor augmented VARs (FAVAR) considered by Bernanke, Boivin and Eliasz (2005) inter alia, which are specified in first differences and are therefore misspecified in the presence of cointegration. The FECM has a vast range of applicability. A set of Monte Carlo experiments and two detailed empirical examples highlight its merits in finite samples relative to standard ECM and FAVAR models. The analysis is conducted primarily within an in-sample framework, although the out-of-sample implications are also explored.

Keywords: Cointegration; Dynamic Factor Models; Error Correction Models; Factor-augmented Error Correction Models; FAVAR; VAR (search for similar items in EconPapers)
JEL-codes: C32 E17 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-cba, nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=6707 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Factor-augmented Error Correction Models (2008) Downloads
Working Paper: Factor-augmented Error Correction Models (2008) Downloads
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:cpr:ceprdp:6707

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=6707

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2020-09-05
Handle: RePEc:cpr:ceprdp:6707