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Empirical Identification Of Factor Models, Piyachart Phiromswad, Takeshi Yagihashi

Economics Faculty Publications

In the conventional factor-augmented vector autoregression (FAVAR), the extracted factors cannot be used in structural analysis because the factors do not retain a clear economic interpretation. This paper proposes a new method to identify macroeconomic factors, which is associated with better economic interpretations. Using an empirical-based search algorithm, we select variables that are individually caused by a single factor. These variables are then used to impose restrictions on the factor loading matrix, and we obtain an economic interpretation for each factor. We apply our method to time-series data in the USA and further conduct a monetary policy analysis. Our method …