Working Paper Series no. 430: Dynamic Factor Models: A review of the Literature (in French)

Abstract

For few years, the increasing size of available economic and financial databases has led econometricians to develop and adapt new methods in order to efficiently summarize information contained in those large datasets. Among those methods, dynamic factor models have known a rapid development and a large success among macroeconomists. In this paper, we carry out a review of the recent literature on dynamic factor models. First we present the models used, then the parameter estimation methods and finally the statistical tests available to choose the number of factors. In the last section, we focus on recent empirical applications, especially dealing with the building of economic outlook indicators, macroeconomic forecasting and macroeconomic and monetary policy analyses.

Karim Barhoumi, Olivier Darné and Laurent Ferrara
March 2013

Classification JEL : C13, C51, C32, E66, F44

Keywords : Dynamic factor models, estimation, tests for the number of factors, macroeconomic applications