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The Generalized Dynamic-Factor Model: Identification and Estimation

Mario Forni1; Marc Hallin2; Marco Lippi3; Lucrezia Reichlin2

1 University of Modena and Reggio Emilia · 2 Université Libre de Bruxelles · 3 Università di Roma

The Review of Economics and Statistics 2000 open access

This paper proposes a factor model with infinite dynamics and nonorthogonal idiosyncratic components. The model, which we call the generalized dynamic-factor model, is novel to the literature and generalizes the static approximate factor model of Chamberlain and Rothschild (1983), as well as the exact factor model à la Sargent and Sims (1977). We provide identification conditions, propose an estimator of the common components, prove convergence as both time and cross-sectional size go to infinity at appropriate rates, and present simulation results. We use our model to construct a coincident index for the European Union. Such index is defined as the common component of real GDP within a model including several macroeconomic variables for each European country.

DOI
10.1162/003465300559037
Volume
82 (4)
Pages
540-554
Language
en
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