TY  - JOUR
AU  - Stock,James H.
AU  - Watson,Mark W.
TI  - Implications of Dynamic Factor Models for VAR Analysis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11467
PY  - 2005
Y2  - July 2005
UR  - http://www.nber.org/papers/w11467
L1  - http://www.nber.org/papers/w11467.pdf
N1  - Author contact info:
James H. Stock
Department of Economics
Harvard University
Littauer Center M27
Cambridge, MA 02138
Tel: 617/496-0502
Fax: 617/495-7730
E-Mail: James_Stock@harvard.edu

Mark W. Watson
Department of Economics
Princeton University
Princeton, NJ 08544-1013
Tel: 609/258-4811
Fax: 609/258-5533
E-Mail: mwatson@princeton.edu
AB  - 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.
ER  -