Identification of Macroeconomic Factors in Large Panels

This paper presents a dynamic factor model where the
extracted factors and shocks are given a clear economic interpretation. The
economic interpretation of the \emph{factors} is obtained by means of a set
of over-identifying loading restrictions, while the structural \emph{shocks}
are estimated following standard practices in the SVAR literature.
Estimators based on the EM algorithm are developed. We apply this framework
to a large panel of US monthly macroeconomic series. In particular, we
identify five macroeconomic factors and discuss the economic impact of
monetary policy shocks. The results are theoretically more plausible than
those implied by standard SVAR models and indicate a significant role for
monetary policy shocks in macroeconomic dynamics