Abstract:

This paper considers VAR models incorporating many time series that interact through a
few dynamic factors. Several econometric issues are addressed including estimation of
the number of dynamic factors and tests for the factor restrictions imposed on the VAR.
Structural VAR identification based on timing restrictions, long run restrictions, and
restrictions on factor loadings are discussed and practical computational methods
suggested. Empirical analysis using U.S. data suggest several (7) dynamic factors,
rejection of the exact dynamic factor model but support for an approximate factor model,
and sensible results for a SVAR that identifies money policy shocks using timing
restrictions.

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