We introduce consistent estimators for the number of shocks driving large-dimensional dynamic factor models. Our estimator can be applied to single frequencies and specific frequency bands, making it suitable for disentangling shocks affecting dynamic models with a factor model representation. Its small-sample performance in simulations is excellent. We apply our estimator to the FRED-QD dataset, finding that the U.S. macroeconomy is driven by two shocks: an inflationary demand shock and a deflationary supply shock.
Avarucci, M., M., Cavicchioli, M., Forni e P., Zaffaroni. "Frequency-Band Estimation of the Number of Factors" Working paper, RECENT WORKING PAPER SERIES, Dipartimento di Economia Marco Biagi, 2025.
Frequency-Band Estimation of the Number of Factors
Cavicchioli, M.;Forni, M.;
2025
Abstract
We introduce consistent estimators for the number of shocks driving large-dimensional dynamic factor models. Our estimator can be applied to single frequencies and specific frequency bands, making it suitable for disentangling shocks affecting dynamic models with a factor model representation. Its small-sample performance in simulations is excellent. We apply our estimator to the FRED-QD dataset, finding that the U.S. macroeconomy is driven by two shocks: an inflationary demand shock and a deflationary supply shock.
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