Factor Analysis in a Model with Rational Expectations / Andreas Beyer, Roger E. A. Farmer, Jérôme Henry, Massimiliano Marcellino.

Format:

Book

Author/Creator:

Beyer, Andreas.

Contributor:

National Bureau of Economic Research.

Farmer, Roger E. A.

Henry, Jérôme.

Marcellino, Massimiliano.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13404.

NBER working paper series no. w13404

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

DSGE models are characterized by the presence of expectations as explanatory variables. To use these models for policy evaluation, the econometrician must estimate the parameters of expectation terms. Standard estimation methods have several drawbacks, including possible lack or weakness of identification of the parameters, misspecification of the model due to omitted variables or parameter instability, and the common use of inefficient estimation methods. Several authors have raised concerns over the implications of using inappropriate instruments to achieve identification. In this paper we analyze the practical relevance of these problems and we propose to combine factor analysis for information extraction from large data sets and GMM to estimate the parameters of systems of forward looking equations. Using these techniques, we evaluate the robustness of recent findings on the importance of forward looking components in the equations of a standard New-Keynesian model.

Notes:

Print version record

September 2007.