Forecasting Euro Area Aggregates with Bayesian VAR and VECM Models
AbstractThis paper focuses on Bayesian Vector Auto-Regressive (BVAR) models for the euro area. A modified hyperparameterization scheme based on the Minnesota prior that takes into account the economic nature of the variables in the model is used. The merits of incorporating long-run relationships are also discussed. Alternative methods to estimate eventual cointegrating relations in the variables are considered, and the problem of choice of appropriate prior distributions for BVAR with Error Correction Mechanism (BECM) models is addressed. Results show that using a flat prior on factor loadings can seriously endanger the forecasting performance of BECM models. Overall, the BVAR model in levels outperforms all other models across variables and forecasting horizons. This is in contrast with other empirical studies where some gains could be obtained when incorporating long-run relationships in the model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200304.
Date of creation: 2003
Date of revision:
Find related papers by JEL classification:
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
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.:
- Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986.
"Forecasting and conditional projection using realistic prior distribution,"
93, Federal Reserve Bank of Minneapolis.
- Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983. "Forecasting and Conditional Projection Using Realistic Prior Distributions," NBER Working Papers 1202, National Bureau of Economic Research, Inc.
- John F. Geweke, 1995.
"Bayesian reduced rank regression in econometrics,"
540, Federal Reserve Bank of Minneapolis.
- Luis J. Álvarez & Fernando C. Ballabriga, 1994. "BVAR models in the context of cointegration: A Monte Carlo experiment," Banco de Espaï¿½a Working Papers 9405, Banco de Espa�a.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Gabriel Fagan & JÊrÆme Henry, 1998. "Long run money demand in the EU: Evidence for area-wide aggregates," Empirical Economics, Springer, vol. 23(3), pages 483-506.
- Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
- LeSage, James P, 1990. "A Comparison of the Forecasting Ability of ECM and VAR Models," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 664-71, November.
- Branimir, Jovanovic & Magdalena, Petrovska, 2010. "Forecasting Macedonian GDP: Evaluation of different models for short-term forecasting," MPRA Paper 43162, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (DEE-NTDD).
If references are entirely missing, you can add them using this form.