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Lag Selection in Subset VAR Models with an Application to a U.S. Monetary System

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Author Info
Ralf Brueggemann (Humboldt Universitaet zu Berlin)
Helmut Leutkepohl (Humboldt Universitaet zu Berlin)

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Abstract

In this paper we consider alternative modeling strategies for specification of subset VAR models. We present four strategies and show that under certain conditions a testing procedure based on t-ratios is equivalent to eliminating sequentially lags that lead to the largest improvement in a prespecified model selection criterion. One finding from our Monte Carlo study is that differences between alternative strategies are small. Moreover, all strategies often fail to discover the true model. We argue that finding the correct model is not always the final modeling objective and find that using subset strategies results in models with improved forecast precision. To illustrate how these subset strategies can improve results from impulse response analysis, we use a VAR model of monetary policy shocks for the U.S. economy. While the response patterns from full and subset VARs are qualitatively identical, confidence bands from the unrestricted model are considerably wider. We conclude that subset strategies can be useful modeling tools when forecasting or impulse response analysis is the main objective.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0821.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0821

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  1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January. [Downloadable!] (restricted)
  2. Alexander Benkwitz & Michael Neumann & Helmut Lütekpohl, 2000. "Problems related to confidence intervals for impulse responses of autoregressive processes," Econometric Reviews, Taylor and Francis Journals, vol. 19(1), pages 69-103. [Downloadable!] (restricted)
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Soo Khoon Goh, 2005. "New empirical evidence on the effects of capital controls on composition of capital flows in Malaysia," Applied Economics, Taylor and Francis Journals, vol. 37(13), pages 1491-1503, July. [Downloadable!] (restricted)
  2. Costas Milas & Phil Rothman, 2005. "Multivariate STAR Unemployment Rate Forecasts," Econometrics 0502010, EconWPA. [Downloadable!]
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