Discussion Paper Details

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Title: Dynamic Common Factors in Large Cross-Sections

Author(s): Mario Forni and Lucrezia Reichlin

Publication Date: December 1995

Keyword(s): Business Cycle, Factor Analysis, Principal Components and Sectoral Comovements

Programme Area(s): International Macroeconomics

Abstract: This paper develops a method to analyse large cross-sections with non-trivial time dimensions. The method: (i) identifies the number of common shocks in a factor analytic model; (ii) estimates the unobserved common dynamic component; (iii) shows how to test for fundamentality of the common shocks; and (iv) quantifies positive and negative comovements at each frequency. We illustrate how the proposed techniques can be used for analysing features of the business cycle and economic growth.

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Bibliographic Reference

Forni, M and Reichlin, L. 1995. 'Dynamic Common Factors in Large Cross-Sections'. London, Centre for Economic Policy Research.