Bayesian Simultaneous Equations Analysis using Reduced Rank Structures
AbstractDiffuse priors lead to pathological posterior behavior when used in Bayesian analyses of Simultaneous Equation Models (SEMs). This results from the local nonidentification of certain parameters in SEMs. When this, a priori known, feature is not captured appropriately, it results in an a posteriori favoring of certain specific parameter values that is not the consequence of strong data information but of local nonidentification. We show that a proper consistent Bayesian analysis of a SEM explicitly has to consider the reduced form of the SEM as a standard linear model on which nonlinear (reduced rank) restrictions are imposed, which result from a singular value decomposition. The priors/posteriors of the parameters of the SEM are therefore proportional to the priors/posteriors of the parameters of the linear model under the condition that the restrictions hold. This leads to a framework for constructing priors and posteriors for the parameters of SEMs. The framework is used to construct priors and posteriors for one, two and three structural equations SEMs. These examples together with a theorem, showing that the reduced forms of SEMs accord with sets of reduced rank restrictions on standard linear models, show how Bayesian analyses of generally specified SEMs can be conducted.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 98-025/4.
Date of creation: 04 Mar 1998
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Web page: http://www.tinbergen.nl
Other versions of this item:
- Kleibergen, Frank & van Dijk, Herman K., 1998. "Bayesian Simultaneous Equations Analysis Using Reduced Rank Structures," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 14(06), pages 701-743, December.
- Kleibergen, F.R. & van Dijk, H.K., 1997. "Bayesian Simultaneous Equations Analysis using Reduced Rank Structures," Econometric Institute Research Papers, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute EI 9714/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- NEP-ALL-2002-02-10 (All new papers)
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