Department of Economics and Business Economics

Regularized Estimation of Structural Instability in Factor Models: The US Macroeconomy and the Great Moderation

Research output: Working paper/Preprint Working paperResearch

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Regularized Estimation of Structural Instability in Factor Models: The US Macroeconomy and the Great Moderation. / Callot, Laurent; Kristensen, Johannes Tang.

Aarhus : Institut for Økonomi, Aarhus Universitet, 2015.

Research output: Working paper/Preprint Working paperResearch

Harvard

APA

Callot, L., & Kristensen, J. T. (2015). Regularized Estimation of Structural Instability in Factor Models: The US Macroeconomy and the Great Moderation. Institut for Økonomi, Aarhus Universitet. CREATES Research Papers No. 2015-29

CBE

MLA

Callot, Laurent and Johannes Tang Kristensen Regularized Estimation of Structural Instability in Factor Models: The US Macroeconomy and the Great Moderation. Aarhus: Institut for Økonomi, Aarhus Universitet. (CREATES Research Papers; Journal number 2015-29). 2015., 30 p.

Vancouver

Author

Callot, Laurent ; Kristensen, Johannes Tang. / Regularized Estimation of Structural Instability in Factor Models: The US Macroeconomy and the Great Moderation. Aarhus : Institut for Økonomi, Aarhus Universitet, 2015. (CREATES Research Papers; No. 2015-29).

Bibtex

@techreport{a7b8d66ab2a54c2688437c39d17fa8f8,
title = "Regularized Estimation of Structural Instability in Factor Models: The US Macroeconomy and the Great Moderation",
abstract = "This paper shows that the parsimoniously time-varying methodology of Callot and Kristensen (2015) can be applied to factor models.We apply this method to study macroeconomic instability in the US from 1959:1 to 2006:4 with a particular focus on the Great Moderation. Models with parsimoniously time-varying parameters are models with an unknown number of break points at unknown locations. The parameters are assumed to follow a random walk with a positive probability that an increment is exactly equal to zero so that the parameters do not vary at every point in time. The vector of increments, which is high dimensional by construction and sparse by assumption, is estimated using the Lasso. We apply this method to the estimation of static factor models and factor augmented autoregressions using a set of 190 quarterly observations of 144 US macroeconomic series from Stock and Watson (2009).We find that the parameters of both models exhibit a higher degree of instability in the period from 1970:1 to 1984:4 relative to the following 15 years. In our setting the Great Moderation appears as the gradual ending of a period of high structural instability that took place in the 1970s and early 1980s.",
keywords = "Parsimoniously time-varying parameters, factor models, structural break, Lasso",
author = "Laurent Callot and Kristensen, {Johannes Tang}",
year = "2015",
month = jun,
day = "2",
language = "English",
series = "CREATES Research Papers",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
number = "2015-29",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - Regularized Estimation of Structural Instability in Factor Models: The US Macroeconomy and the Great Moderation

AU - Callot, Laurent

AU - Kristensen, Johannes Tang

PY - 2015/6/2

Y1 - 2015/6/2

N2 - This paper shows that the parsimoniously time-varying methodology of Callot and Kristensen (2015) can be applied to factor models.We apply this method to study macroeconomic instability in the US from 1959:1 to 2006:4 with a particular focus on the Great Moderation. Models with parsimoniously time-varying parameters are models with an unknown number of break points at unknown locations. The parameters are assumed to follow a random walk with a positive probability that an increment is exactly equal to zero so that the parameters do not vary at every point in time. The vector of increments, which is high dimensional by construction and sparse by assumption, is estimated using the Lasso. We apply this method to the estimation of static factor models and factor augmented autoregressions using a set of 190 quarterly observations of 144 US macroeconomic series from Stock and Watson (2009).We find that the parameters of both models exhibit a higher degree of instability in the period from 1970:1 to 1984:4 relative to the following 15 years. In our setting the Great Moderation appears as the gradual ending of a period of high structural instability that took place in the 1970s and early 1980s.

AB - This paper shows that the parsimoniously time-varying methodology of Callot and Kristensen (2015) can be applied to factor models.We apply this method to study macroeconomic instability in the US from 1959:1 to 2006:4 with a particular focus on the Great Moderation. Models with parsimoniously time-varying parameters are models with an unknown number of break points at unknown locations. The parameters are assumed to follow a random walk with a positive probability that an increment is exactly equal to zero so that the parameters do not vary at every point in time. The vector of increments, which is high dimensional by construction and sparse by assumption, is estimated using the Lasso. We apply this method to the estimation of static factor models and factor augmented autoregressions using a set of 190 quarterly observations of 144 US macroeconomic series from Stock and Watson (2009).We find that the parameters of both models exhibit a higher degree of instability in the period from 1970:1 to 1984:4 relative to the following 15 years. In our setting the Great Moderation appears as the gradual ending of a period of high structural instability that took place in the 1970s and early 1980s.

KW - Parsimoniously time-varying parameters, factor models, structural break, Lasso

M3 - Working paper

T3 - CREATES Research Papers

BT - Regularized Estimation of Structural Instability in Factor Models: The US Macroeconomy and the Great Moderation

PB - Institut for Økonomi, Aarhus Universitet

CY - Aarhus

ER -