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A0705
Title: Nested dynamic factor modeling: A coherent approach to measure national and state coincident indexes Authors:  Juan-Carlos Martinez-Ovando - ITAM (Mexico) [presenting]
Abstract: Dynamic factor models have been used as a workhorse to measure business cycles from several economic information. However, when the economic information is available at aggregated and disaggregated levels (state or sectorial), the computations derived from this methodology exhibit some sorts of inconsistencies. A solution to that problem was proposed previously by deriving an ad-hoc procedure to consistently measure coincident indexes for the 50 states of the US economy. We develop an alternative procedure based on the notion of nested dynamic factor model, i.e. a dimensional reduction technique which takes into consideration the information contained in the coincident economic information for the states' economies and the aggregate, simultaneously. Our procedure, in this way, generalizes the approach previously adopted, and allows us to provide a coherent reading of local and aggregated business cycles. We illustrate our proposal by means of computing coherent national and states coincident indexes for the US and Mexico.