DP1285 Dynamic Common Factors in Large Cross-Sections

Author(s): Mario Forni, Lucrezia Reichlin
Publication Date: December 1995
Keyword(s): Business Cycle, Factor Analysis, Principal Components, Sectoral Comovements
JEL(s): C51, E32, O30
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1285

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.