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The Value of Structural Information in the VAR Model

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Author Info

  • Rodney W. Strachan

    ()
    (Keele University, Department of Economics)

  • Herman K. van Dijk

    ()
    (Erasmus University Rotterdam)

Abstract

Economic policy decisions are often informed by empirical economic analysis. While the decision-maker is usually only interested in good estimates of outcomes, the analyst is interested in estimating the model. Accurate inference on the structural features of a model, such as cointegration, can improve policy analysis as it can improve estimation, inference and forecast efficiency from using that model. However, using a model does not guarantee good estimates of the object of interest and, as it assigns a probability of one to a model and zero to near-by models, takes extreme zero-one account of the ‘weight of evidence’ in the data and the researcher’s uncertainty. By using the uncertainty associated with the structural features in a model set, one obtains policy analysis that is not conditional on the structure of the model and can improve efficiency if the features are appropriately weighted. In this paper tools are presented to allow for unconditional inference on the vector autoregressive (VAR) model. In particular, we employ measures on manifolds to elicit priors on subspaces defined by particular features of the VAR model. The features considered are cointegration, exogeneity, deterministic processes and overidentification. Two applications - money demand in Australia, and a macroeconomic model of the UK proposed by Garratt, Lee, Persaran, and Shin (2002) are used to illustrate the feasibility of the proposed methods.

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Bibliographic Info

Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2004/02.

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Length: 37 pages
Date of creation: Jan 2004
Date of revision:
Handle: RePEc:kee:kerpuk:2004/02

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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
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Web page: http://www.keele.ac.uk/depts/ec/cer/
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Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Related research

Keywords: Posterior probability; Laplace approximation; Structural modelling; Cointegration; Exogeneity; Model averaging;

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Cited by:
  1. Gary Koop & Simon M. Potter & Rodney W. Strachan, 2008. "Re-Examining the Consumption-Wealth Relationship: The Role of Model Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 341-367, 03.

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