TY  - JOUR
AU  - Beyer,Andreas
AU  - Farmer,Roger E. A.
AU  - Henry,Jérôme
AU  - Marcellino,Massimiliano
TI  - Factor Analysis in a Model with Rational Expectations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13404
PY  - 2007
Y2  - September 2007
UR  - http://www.nber.org/papers/w13404
L1  - http://www.nber.org/papers/w13404.pdf
N1  - Author contact info:
Andreas Beyer
European Central Bank
Postfach 16 03 19
D-60066
Frankfurt am Main
Germany
E-Mail: andreas.beyer@ecb.int

Roger Farmer
UCLA
Department of Economics
Box 951477
Los Angeles, CA 90095-1477
Tel: 310/825-6547
Fax: 310/825-9528
E-Mail: rfarmer@econ.ucla.edu

Jerome Henry
Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
E-Mail: Jerome.Henry@ecb.int

Massimiliano Marcellino
Dept. of Economics
European University Institute
Via della Piazzuola 43
50133 Firenze, Italy
E-Mail: massimiliano.marcellino@eui.eu
AB  - DSGE models are characterized by the presence of expectations as explanatory variables. To use these models for policy evaluation, the econometrician must estimate the parameters of expectation terms. Standard estimation methods have several drawbacks, including possible lack or weakness of identification of the parameters, misspecification of the model due to omitted variables or parameter instability, and the common use of inefficient estimation methods. Several authors have raised concerns over the implications of using inappropriate instruments to achieve identification. In this paper we analyze the practical relevance of these problems and we propose to combine factor analysis for information extraction from large data sets and GMM to estimate the parameters of systems of forward looking equations. Using these techniques, we evaluate the robustness of recent findings on the importance of forward looking components in the equations of a standard New-Keynesian model.
ER  -