Factor vector autoregressive estimation: a new approach

In this paper a new approach to factor vector autoregressive estimation, based on Stock and Watson (Implications of dynamic factor models for VAR analysis, NBER Working Paper, no. 11467, 2005), is introduced. In addition to sharing all the relevant features of the Stock–Watson approach, in its static formulation, the proposed method has the advantage of allowing for a more clear-cut interpretation of the global factors, as well as for the identification of all idiosyncratic shocks. An application to large-scale macroeconometric modelling is also provided. The authors are grateful to an anonymous referee for constructive comments and to MIUR (PRIN project 2005) for financial support.