Priors about Observables in Vector Autoregressions
AbstractStandard practice in Bayesian VARs is to formulate priors on the autoregres- sive parameters, but economists and policy makers actually have priors about the behavior of observable variables. We show how this kind of prior can be used in a VAR under strict probability theory principles. We state the inverse problem to be solved and we propose a numerical algorithm that works well in practical situations with a very large number of parameters. We prove various convergence theorems for the algorithm. As an application, we first show that the results in Christiano et al. (1999) are very sensitive to the introduction of various priors that are widely used. These priors turn out to be associated with undesirable priors on observables. But an empirical prior on observables helps clarify the relevance of these estimates: we find much higher persistence of out- put responses to monetary policy shocks than the one reported in Christiano et al. (1999) and a significantly larger total effect.
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Bibliographic InfoPaper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 929.13.
Date of creation: 18 Mar 2013
Date of revision:
Vector Autoregression; Bayesian Estimation; Prior about Observables; Inverse Problem; Monetary Policy Shocks;
Other versions of this item:
- Marek Jarocinski & Albert Marcet, 2013. "Priors about Observables in Vector Autoregressions," Working Papers 684, Barcelona Graduate School of Economics.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-13 (All new papers)
- NEP-ECM-2013-04-13 (Econometrics)
- NEP-ETS-2013-04-13 (Econometric Time Series)
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