Structural FECM: cointegration in large-scalestructural FAVAR models

Research output: Contribution to journalArticle

Authors

External organisations

  • Department of Economics, Bocconi University, Milan
  • Department of Economics, University of Ljubljana

Abstract

Starting from the dynamic factor model for non-stationary data we derive the
factor-augmented error correction model (FECM) and its moving-average representation.The latter is used for the identication of structural shocks and their propagation mechanisms. We show how to implement classical identication schemes based on long-run restrictions in the case of large panels. The importance of the error-correction mechanism for impulse response analysis is analysed by means of both empirical examples and simulation experiments. Our results show that the bias in estimated impulse responses in a FAVAR model is positively related to the strength of the error-correction mechanism and the cross-section dimension of the panel. We observe empirically in a large panel of US data that these features have a substantial effect on the responses of several variables to the identied permanent real (productivity) and monetary policy shocks.

Details

Original languageEnglish
Pages (from-to)1069-1086
Number of pages18
JournalJournal of Applied Econometrics
Volume32
Issue number6
Early online date3 May 2017
Publication statusPublished - 1 Sep 2017

Keywords

  • Dynamic Factor Models, Cointegration, Structural Analysis, Factor-augmented Error Correction Models, FAVAR