Citation

Discussion Paper Details

Please find the details for DP9858 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Structural FECM: Cointegration in large-scale structural FAVAR models

Author(s): Anindya Banerjee, Massimiliano Marcellino and Igor Masten

Publication Date: March 2014

Keyword(s): Cointegration, Dynamic Factor Models, Factor-augmented Error Correction Models, FAVAR and Structural Analysis

Programme Area(s): International Macroeconomics

Abstract: Starting from the dynamic factor model for non-stationary data we derive the factor-augmented error correction model (FECM) and, by generalizing the Granger representation theorem, its moving-average representation. The latter is used for the identification of structural shocks and their propagation mechanism. Besides discussing contemporaneous restrictions along the lines of Bernanke et al. (2005), we show how to implement classical identification 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 identified real shock.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9858

Bibliographic Reference

Banerjee, A, Marcellino, M and Masten, I. 2014. 'Structural FECM: Cointegration in large-scale structural FAVAR models'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9858