Finance and Economics Discussion Series (FEDS)

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November 2017

Common Factors, Trends, and Cycles in Large Datasets

Matteo Barigozzi and Matteo Luciani

Abstract:

This paper considers a non-stationary dynamic factor model for large datasets to disentangle long-run from short-run co-movements. We first propose a new Quasi Maximum Likelihood estimator of the model based on the Kalman Smoother and the Expectation Maximisation algorithm. The asymptotic properties of the estimator are discussed. Then, we show how to separate trends and cycles in the factors by mean of eigenanalysis of the estimated non-stationary factors. Finally, we employ our methodology on a panel of US quarterly macroeconomic indicators to estimate aggregate real output, or Gross Domestic Output, and the output gap.

Accessible materials (.zip)

Keywords: EM Algorithm, Gross Domestic Output, Kalman Smoother, Non-stationary Approximate Dynamic Factor Model, Output Gap, Quasi Maximum Likelihood, Trend-Cycle Decomposition

DOI: https://doi.org/10.17016/FEDS.2017.111

PDF: Full Paper

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Last Update: January 09, 2020