Bayesian Averaging over Many Dynamic Model Structures with Evidence on the Great Ratios and Liquidity Trap Risk
AbstractA Bayesian model averaging procedure is presented that makes use of a finite mixture of many model structures within the class of vector autoregressive (VAR) processes. It is applied to two empirical issues. First, stability of the Great Ratios in U.S. macro-economic time series is investigated, together with the effect of permanent shocks on business cycles. Second, the linear VAR model is extended to include a smooth transition function in a (monetary) equation and stochastic volatility in the disturbances. The risk of a liquidity trap in the U.S.A. and Japan is evaluated. Although this risk found to be reasonably high, we find only mild evidence that the monetary policy transmission mechanism is different and that central banks consider the expected cost of a liquidity trap in policy setting. Posterior probabilities of different models are evaluated using Markov chain Monte Carlo techniques.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 08-096/4.
Date of creation: 10 Oct 2008
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Posterior probability; Grassman manifold; Orthogonal group; Cointegration; Model averaging; Stochastic trend; Impulse response; Vector autoregressive model; Great Ratios; Liquidity trap;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-14 (All new papers)
- NEP-CBA-2008-12-14 (Central Banking)
- NEP-ECM-2008-12-14 (Econometrics)
- NEP-ORE-2008-12-14 (Operations Research)
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