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Large time-varying parameter VARs

  • Koop, Gary
  • Korobilis, Dimitris

In this paper, we develop methods for estimation and forecasting in large time-varying parameter vector autoregressive models (TVP-VARs). To overcome computational constraints, we draw on ideas from the dynamic model averaging literature which achieve reductions in the computational burden through the use forgetting factors. We then extend the TVP-VAR so that its dimension can change over time. For instance, we can have a large TVP-VAR as the forecasting model at some points in time, but a smaller TVP-VAR at others. A final extension lies in the development of a new method for estimating, in a time-varying manner, the parameter(s) of the shrinkage priors commonly-used with large VARs. These extensions are operationalized through the use of forgetting factor methods and are, thus, computationally simple. An empirical application involving forecasting inflation, real output and interest rates demonstrates the feasibility and usefulness of our approach.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 177 (2013)
Issue (Month): 2 ()
Pages: 185-198

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Handle: RePEc:eee:econom:v:177:y:2013:i:2:p:185-198
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  1. Joshua Chan & Gary Koop & Roberto Leon-Gonzalez & Rodney Strachan, 2011. "Time Varying Dimension Models," Working Papers 1116, University of Strathclyde Business School, Department of Economics.
  2. Koop, Gary & Leon-Gonzalez, Roberto & Strachan, Rodney W., 2009. "On the evolution of the monetary policy transmission mechanism," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 997-1017, April.
  3. Cogley, Timothy & Morozov, Sergei & Sargent, Thomas J., 2005. "Bayesian fan charts for U.K. inflation: Forecasting and sources of uncertainty in an evolving monetary system," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1893-1925, November.
  4. Giannone, Domenico & Lenza, Michele & Momferatou, Daphne & Onorante, Luca, 2010. "Short-Term Inflation Projections: a Bayesian Vector Autoregressive approach," CEPR Discussion Papers 7746, C.E.P.R. Discussion Papers.
  5. Koop, Gary & Korobilis, Dimitris, 2009. "Bayesian Multivariate Time Series Methods for Empirical Macroeconomics," MPRA Paper 20125, University Library of Munich, Germany.
  6. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report 93, Federal Reserve Bank of Minneapolis.
  7. Giannone, Domenico & Lenza, Michele & Primiceri, Giorgio E., 2012. "Prior selection for vector autoregressions," Working Paper Series 1494, European Central Bank.
  8. Gambetti, Luca & D’Agostino, Antonello & Giannone, Domenico, 2010. "Macroeconomic forecasting and structural change," Working Paper Series 1167, European Central Bank.
  9. Matteo Ciccarelli & Fabio Canova, 2006. "Estimating Multi-country VAR models," Computing in Economics and Finance 2006 478, Society for Computational Economics.
  10. Dimitris Korobilis, 2013. "Var Forecasting Using Bayesian Variable Selection," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(2), pages 204-230, 03.
  11. A. Carriero & G. Kapetanios & M. Marcellino, 2008. "Forecasting Exchange Rates with a Large Bayesian VAR," Economics Working Papers ECO2008/33, European University Institute.
  12. Carriero, Andrea & Clark, Todd & Marcellino, Massimiliano, 2012. "Common Drifting Volatility in Large Bayesian VARs," CEPR Discussion Papers 8894, C.E.P.R. Discussion Papers.
  13. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
  14. Dangl, Thomas & Halling, Michael, 2012. "Predictive regressions with time-varying coefficients," Journal of Financial Economics, Elsevier, vol. 106(1), pages 157-181.
  15. Gary Koop, 2011. "Forecasting with Medium and Large Bayesian VARs," Working Papers 1117, University of Strathclyde Business School, Department of Economics.
  16. Gary Koop & Dimitris Korobilis, 2011. "Forecasting Inflation Using Dynamic Model Averaging," Working Papers 1119, University of Strathclyde Business School, Department of Economics.
  17. Carriero, Andrea & Clark, Todd & Marcellino, Massimiliano, 2011. "Bayesian VARs: Specification Choices and Forecast Accuracy," CEPR Discussion Papers 8273, C.E.P.R. Discussion Papers.
  18. Jochmann, Markus & Koop, Gary & Strachan, Rodney W., 2010. "Bayesian forecasting using stochastic search variable selection in a VAR subject to breaks," International Journal of Forecasting, Elsevier, vol. 26(2), pages 326-347, April.
  19. Marcellino, Massimiliano & Stock, James H & Watson, Mark W, 2005. "A Comparison of Direct and Iterated Multistep AR Methods for Forecasting Macroeconomic Time Series," CEPR Discussion Papers 4976, C.E.P.R. Discussion Papers.
  20. Gary Koop & Roberto Leon-Gonzalez & Rodney W. Strachan, 2008. "On the Evolution of Monetary Policy," Working Paper Series 24-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
  21. Marta Bańbura, 2008. "Large Bayesian VARs," 2008 Meeting Papers 334, Society for Economic Dynamics.
  22. repec:oup:restud:v:72:y:2005:i:3:p:821-852 is not listed on IDEAS
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