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A Bayesian Vector Autoregressive Model with Informative Steady-state Priors for the Australian Economy

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  • MEREDITH BEECHEY
  • PÄR ÖSTERHOLM

Abstract

This article applies a Bayesian vector autoregressive model with informative steady-state priors to a parsimonious model of the Australian economy. The model captures economic linkages among key Australian and US variables and is estimated on quarterly data from 1985 to 2006. An out-of-sample forecast exercise shows that the model with informative steady-state priors generally outperforms a traditional Bayesian vector autoregressive model as well as naïve forecasts. The model can also be used to generate density forecasts and analyse alternative scenarios, which we illustrate with the effect on the Australian economy of a substantial real depreciation of the US dollar. Copyright © 2008 The Economic Society of Australia.

Suggested Citation

  • Meredith Beechey & Pär Österholm, 2008. "A Bayesian Vector Autoregressive Model with Informative Steady-state Priors for the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 84(267), pages 449-465, December.
  • Handle: RePEc:bla:ecorec:v:84:y:2008:i:267:p:449-465
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    Cited by:

    1. SENBETA, Sisay Regassa, 2012. "How important are external shocks in explaining growth in Sub-Saharan Africa? Evidence from a Bayesian VAR," Working Papers 2012010, University of Antwerp, Faculty of Applied Economics.
    2. van Roye, Björn, 2011. "Financial stress and economic activity in Germany and the Euro Area," Kiel Working Papers 1743, Kiel Institute for the World Economy (IfW).
    3. Utlaut, Johannes Friederich & van Roye, Björn, 2010. "The effects of external shocks to business cycles in emerging Asia: A Bayesian VAR approach," Kiel Working Papers 1668, Kiel Institute for the World Economy (IfW).
    4. Louzis Dimitrios P., 2016. "Steady-state priors and Bayesian variable selection in VAR forecasting," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 20(5), pages 495-527, December.
    5. Pär Stockhammar & Pär Österholm, 2017. "The Impact of US Uncertainty Shocks on Small Open Economies," Open Economies Review, Springer, vol. 28(2), pages 347-368, April.
    6. Par Osterholm, 2010. "The effect on the Swedish real economy of the financial crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 20(4), pages 265-274.
    7. James Bishop & Peter Tulip, 2017. "Anticipatory Monetary Policy and the 'Price Puzzle'," RBA Research Discussion Papers rdp2017-02, Reserve Bank of Australia.

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