New VAR models reveal key factors driving U.S. economic policy decisions.
The article explores how to analyze relationships between many time series using a few dynamic factors in VAR models. It discusses estimating the number of dynamic factors, testing factor restrictions, and identifying structural VARs. The researchers found that there are around 7 dynamic factors in U.S. data, rejecting an exact model but supporting an approximate one. They also obtained sensible results for identifying monetary policy shocks using timing restrictions.