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Title:Common stationary and non-stationary factors in the euro area analyzed in a large-scale factor model PDF Logo
Authors:Eickmeier, Sandra
Issue Date:2005
Series/Report no.:Discussion paper Series 1 / Volkswirtschaftliches Forschungszentrum der Deutschen Bundesbank 2005,02
Abstract:In this paper we rely on techniques recently developed by Bai and Ng (2004a) to estimate common euro-area stationary and non-stationary factors using a large-scale dynamic factor model. We find that euro-area economies share four non-stationary factors or trends and one stationary factor. By means of rotation techniques, we estimate a euro-area business cycle which is a fairly good match to EuroCOIN, the euro-area coincident business cycle indicator published by the CEPR. Fluctuations of common euro-area factors mainly reflect variations of German and French real economic activity as well as of producer prices and financial prices (long-term interest rates and/or real effective exchange rates) in various countries. As concerns the transmission channels, macroeconomic shocks seem to proliferate in the euro area more strongly through trade, exchange rates and long-term interest rates than through stock prices. Among the external driving forces, shocks to US economic activity seem to be more strongly linked to shocks to the euro-area factors than oil price shocks. We finally find evidence of mild overall convergence; results for individual countries are mixed.
Subjects:Dynamic factor models
factor rotation
common trends
international business cycles
international transmission channels
JEL:C50
F40
F02
C32
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 1: Economic Studies, Deutsche Bundesbank

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