Forni, Mario Giannone, Domenico Lippi, Marco Reichlin, Lucrezia
Year of Publication:
ECB Working Paper 712
This paper shows how large-dimensional dynamic factor models are suitable for structural analysis. We establish sufficient conditions for identification of the structural shocks and the associated impulse response functions. In particular, we argue that, if the data follow an approximate factor structure, the “problem of fundamentalness”, which is intractable in structural VARs, can be solved provided that the impulse responses are sufficiently heterogeneous. Finally, we propose a consistent method (and n, T rates of convergence) to estimate the impulse-response functions, as well as a bootstrapping procedure for statistical inference.
Dynamic Factor Models fundamentalness Identification structural VARs