FACTOR ANALYSIS OF A LARGE DSGE MODEL
Article first published online: 19 JUN 2012
Copyright © 2012 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 28, Issue 6, pages 903–928, September/October 2013
How to Cite
Onatski, A. and Ruge-Murcia, F. (2013), FACTOR ANALYSIS OF A LARGE DSGE MODEL. J. Appl. Econ., 28: 903–928. doi: 10.1002/jae.2287
- Issue published online: 18 SEP 2013
- Article first published online: 19 JUN 2012
- Manuscript Revised: 15 FEB 2012
- Manuscript Received: 27 SEP 2010
- Social Sciences and Humanities Research Council of Canada. Grant Number: 410-2010-0235
We study the workings of the factor analysis of high-dimensional data using artificial series generated from a large, multi-sector dynamic stochastic general equilibrium (DSGE) model. The objective is to use the DSGE model as a laboratory that allows us to shed some light on the practical benefits and limitations of using factor analysis techniques on economic data. We explain in what sense the artificial data can be thought of having a factor structure, study the theoretical properties of the principal components estimates of the factor space, investigate the substantive reason(s) for the good performance of diffusion index forecasts, and assess the quality of the factor analysis of highly disaggregated data. In all our exercises, we explain the precise relationship between the factors and the basic macroeconomic shocks postulated by the model. Copyright © 2012 John Wiley & Sons, Ltd.