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General--to--Specific Reductions of Vector Autoregressive Processes

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Hans-Martin Krolzig

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Abstract

Unrestricted reduced form vector autoregressive (VAR) models have become a dominant research strategy in empirical macroeconomics since Sims (1980) critique of traditional macroeconometric modeling. They are however subjected to the curse of dimensionality. In this paper we propose general-to-specific reductions of VAR models and consider computer-automated model selection algorithms embodied in PcGets (see Krolzig and Hendry, 2000) for doing so. Starting from the unrestricted VAR, standard testing procedures eliminate statistically-insignificant variables, with diagnostic tests checking the validity of reductions, ensuring a congruent final selection. Since jointly selecting and diagnostic testing eludes theoretical analysis, we evaluate the proposed strategy by simulation. The Monte Carlo experiments show that PcGets recovers the DGP specification from a large unrestricted VAR model with size and power close to commencing from the DGP itself. The application of the proposed reduction strategy to a US monetary system demonstrates the feasibility of PcGets for the analysis of large macroeconomic data sets.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 164.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:164

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Keywords: Econometric methodology Model selection Vector autoregression Data mining.

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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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. Krolzig, Hans-Martin & Hendry, David F., 2001. "Computer automation of general-to-specific model selection procedures," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 831-866, June. [Downloadable!] (restricted)
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  2. Kevin D. Hoover & Stephen J. Perez, 1999. "Data mining reconsidered: encompassing and the general-to-specific approach to specification search," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 167-191.
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  3. Hendry, David F., 1984. "Monte carlo experimentation in econometrics," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 16, pages 937-976 Elsevier. [Downloadable!] (restricted)
  4. Lovell, Michael C, 1983. "Data Mining," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 1-12, February. [Downloadable!] (restricted)
  5. Hendry, David F, 1980. "Econometrics-Alchemy or Science?," Economica, London School of Economics and Political Science, vol. 47(188), pages 387-406, November. [Downloadable!] (restricted)
  6. David F. Hendry & Hans-Martin Krolzig, 1999. "Improving on 'Data mining reconsidered' by K.D. Hoover and S.J. Perez," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 202-219.
  7. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January. [Downloadable!] (restricted)
  8. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February. [Downloadable!] (restricted)
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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. David F. Hendry & Hans-Martin Krolzig, 2003. "Sub-sample Model Selection Procedures in Gets Modelling," Economics Papers 2003-W17, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
  2. Carmine Pappalardo & Gianfranco Piras, 2004. "Vector-Autoregression Approach to Forecast Italian Imports," ISAE Working Papers 42, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
  3. Valpy FitzGerald & Derya Krolzig, 2003. "Modeling the Demand for Emerging Market Assets," OFRC Working Papers Series 2003fe10, Oxford Financial Research Centre. [Downloadable!]
  4. David Hendry & Hans-Martin Krolzig, 2003. "The Properties of Automatic Gets Modelling," Economics Papers 2003-W14, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
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  5. Hans-Martin Krolzig, 2003. "General-to-Specific Model Selection Procedures for Structural Vector Autoregressions," Economics Papers 2003-W15, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
  6. R. Brüggemann, . "On the Small Sample Properties of Weak Exogeneity Tests in Cointegrated VAR models," Sonderforschungsbereich 373 2002-2, Humboldt Universitaet Berlin.
  7. Ralf Brüggemann & Hans-Martin Krolzig & Helmut Lütkepohl, 2003. "Comparison of Model Reduction Methods for VAR Processes," Economics Papers 2003-W13, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
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  8. Valpy FitzGerald & Derya Krolzig, 2004. "Modelling the demand for emerging market assets," Money Macro and Finance (MMF) Research Group Conference 2003 29, Money Macro and Finance Research Group. [Downloadable!]
  9. Peter Flaschel & Hans-Martin Krolzig, 2003. "Wage and Price Phillips Curves An empirical analysis of destabilizing wage-price spirals," Economics Papers 2003-W16, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
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