Factor analysis in a New-Keynesian model

Andreas Beyer (), Roger Farmer, Jérôme Henry and Massimiliano Marcellino

No 510, Working Paper Series from European Central Bank

Abstract: New-Keynesian models are characterized by the presence of expectations as explanatory variables. To use these models for policy evaluation, the econometrician must estimate the parameters of expectation terms. Standard estimation methods have several drawbacks, including possible lack of identification of the parameters, misspecification of the model due to omitted variables or parameter instability, and the common use of inefficient estimation methods. Several authors have raised concerns over the validity of commonly used instruments to achieve identification. In this paper we analyze the practical relevance of these problems and we propose remedies to weak identification based on recent developments in factor analysis for information extraction from large data sets. Using these techniques, we evaluate the robustness of recent findings on the importance of forward looking components in the equations of the New-Keynesian model. JEL Classification: E5, E52, E58

Keywords: determinacy of equilibrium; factor analysis; forward looking output equation; New-Keynesian Phillips Curve; rational expectations; Taylor rule (search for similar items in EconPapers)
Date: 2005-08
Note: 336354
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Working Paper: Factor Analysis in a New-Keynesian Model (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2005510

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