Testing the interpretation of indices in a macroeconomic index model

Mark W. Watson, Dennis F. Kraft

Research output: Contribution to journalArticlepeer-review

5 Scopus citations


This paper discusses and contrasts different approaches to the construction of dynamic models containing unobservables. It is argued that some analysis is easy to carry out using Dynamic Factor Analysis (DFA), a frequency domain technique, while other analysis is easier to carry out in the context of a Dynamic Multiple Indicator-Multiple Cause Model (DYMIMIC), a time domain technique. An example is presented in which six macroeconomic variables are found to be connected by two common factors using DFA. The interpretation of these factors as 'anticipated' and 'unanticipated' aggregate demand is then tested using the DYMIMIC model. This interpretation is strongly rejected.

Original languageEnglish (US)
Pages (from-to)165-181
Number of pages17
JournalJournal of Monetary Economics
Issue number2
StatePublished - Mar 1984
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


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