DP17281 The Main Business Cycle Shock(s): Frequency-Band Estimation of the Number of Dynamic Factors

Author(s): Marco Avarucci, Maddalena Cavicchioli, Mario Forni, Paolo Zaffaroni
Publication Date: May 2022
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17281

We introduce a consistent estimator for the number of shocks driving dynamic macroeconomic models that can be written as large factor models. Our estimator can be applied to single frequencies as well as to specific frequency bands, making it suitable for disentangling shocks affecting the macroeconomy. Its small-sample performance in simulations is excellent, even in estimating the number of shocks that drive DSGE models. Based on the FRED-QD dataset, we find that the U.S. macroeconomy is driven by two shocks: an inflationary demand shock and a deflationary supply shock. The demand shock is the most important.