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Detecting time variation in the price puzzle: a less informative prior choice for time varying parameter VAR models

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  • Reusens Peter

    (National Bank of Belgium, De Berlaimontlaan 14, 1000 Brussels, KU Leuven, Belgium)

  • Croux Christophe

    (EDHEC Business School, Avenue Gustave, Delory 24, 59057 Roubaix, France)

Abstract

This paper compares Bayesian estimators with different prior choices for the time variation of the coefficients of Time Varying Parameter Vector Autoregression models using Monte Carlo simulations. Since the commonly used prior choice only allows for a tiny amount of time variation, less informative priors are proposed. Additional empirical evidence on the time varying response of inflation to an interest rate shock is provided for USA. While a ‘price puzzle’ is detected for the period 1972–1979, the estimated response of inflation to an interest rate shock is negative for most other time periods.

Suggested Citation

  • Reusens Peter & Croux Christophe, 2017. "Detecting time variation in the price puzzle: a less informative prior choice for time varying parameter VAR models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(4), pages 1-18, September.
    • Handle: RePEc:bpj:sndecm:v:21:y:2017:i:4:p:18:n:1
    DOI: 10.1515/snde-2015-0018
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