Estimation and inference of dynamic structural factor models with over-identifying restrictions

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Journal of Econometrics, ISSN: 0304-4076, Vol: 202, Issue: 2, Page: 125-147

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Xu Han
Elsevier BV
Economics, Econometrics and Finance
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article description
This paper develops a new estimator for the impulse response functions in structural factor models with a fixed number of over-identifying restrictions. The proposed identification scheme nests the conventional just-identified recursive scheme as a special case. We establish the asymptotic distributions of the new estimator and develop test statistics for the over-identifying restrictions. Simulation results show that adding a few more over-identifying restrictions can lead to a substantial improvement in estimation accuracy for impulse response functions at both zero and nonzero horizons. We estimate the effects of a monetary policy shock using a U.S. data set. The results show that our over-identified scheme can help to detect incorrect specifications that lead to spurious impulse responses.