Dynamic Factor Analysis as a Methodology of Business Cycle Research

by Kholodilin, Konstantin A.

Abstract (Summary)
The main objective of our research undertaken in this thesis is to elaborate a technique of constructing a composite economic indicator or a set of such indicators which would correspond to the theoretical concept of business cycle and reflect a phenomenon which may be interpreted as the cyclical dynamics of the economy. As a point of departure we have chosen the definition of business cycle proposed by Burns and Mitchell (1946). We believe that the most appropriate method to capture the Burns and Mitchell's cycle would be the dynamic factor analysis. The dynamic factor analysis in its current state requires undoubtedly some refinements and extensions to obtain unbiased and consistent estimates of the composite economic indicators and to use the available information in the best possible way. Our research is mostly oriented towards the practitioners who have opted for using the dynamic factor approach in the construction of the business cycle indicator both at the regional and national levels. The thesis is comprised of five chapters where the first and the last chapters are the introduction and conclusion delineating the objectives of the study and summarizing the results achieved during research. Chapter two describes various approaches to the analysis of economic fluctuations proposed during the last 20 years. On the one hand, it concentrates on models with nonlinear, namely Markov-switching, dynamics, on the other hand, it is concerned with dynamic factor models. Finally, it shows the combined techniques which unify these two principal approaches, thus, modeling common latent factor with regime-switching dynamics. In chapter three we introduce a general multifactor dynamic model with linear and regime-switching dynamics. This model allows capturing the intertemporal (leading versus coincident) dimension of the latent common factors. Two alternative multifactor dynamic models with a leading and a coincident unobserved common factors are examined: a model where the common coincident factor is Granger-caused by the common leading factor and a model where the leading relationship is translated into a set of specific restrictions imposed on the transition probabilities matrix. Chapter four concentrates on the supplementary devices which allow to overcome some data problems which are very frequent in the practitioner's life. Among the most prominent are the structural breaks and missing observations. It is shown that some of these troubles can be coped with by modifying the dynamic common factors models, which leads to more efficient estimates of the parameters of the models.
This document abstract is also available in Spanish.
Bibliographical Information:

Advisor:Creel, Michael

School:Universitat Autónoma de Barcelona

School Location:Spain

Source Type:Master's Thesis

Keywords:412 departament d economia i historia economica


Date of Publication:04/23/2003

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