Dynamic factor analysis with non-linear temporal aggregation constraints

The paper estimates an index of coincident economic indicators for the US economy by using time series with different frequencies of observation (monthly and quarterly, possibly with missing values). The model that is considered is the dynamic factor model that was proposed by Stock and Watson, specified in the logarithms of the original variables and at the monthly frequency, which poses a problem of temporal aggregation with a non-linear observational constraint when quarterly time series are included. Our main methodological contribution is to provide an exact solution to this problem that hinges on conditional mode estimation by iteration of the extended Kalman filtering and smoothing equations. On the empirical side the contribution of the paper is to provide monthly estimates of quarterly indicators, among which is the gross domestic product, that are consistent with the quarterly totals. Two applications are considered: the first dealing with the construction of a coincident index for the US economy, whereas the second does the same with reference to the euro area. Copyright 2006 Royal Statistical Society.