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Modelling Breaks and Clusters in the Steady States of Macroeconomic Variables

Author

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  • Joshua C.C. Chan
  • Gary Koop

Abstract

Macroeconomists working with multivariate models typically face uncertainty over which (if any) of their variables have long run steady states which are subject to breaks. Furthermore, the nature of the break process is often unknown. In this paper, we draw on methods from the Bayesian clustering literature to develop an econometric methodology which: i) finds groups of variables which have the same number of breaks; and ii) determines the nature of the break process within each group. We present an application involving a five-variate steady-state VAR.

Suggested Citation

  • Joshua C.C. Chan & Gary Koop, 2013. "Modelling Breaks and Clusters in the Steady States of Macroeconomic Variables," ANU Working Papers in Economics and Econometrics 2013-603, Australian National University, College of Business and Economics, School of Economics.
    • Handle: RePEc:acb:cbeeco:2013-603
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    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp603.pdf
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    2. Maximo Camacho & María Dolores Gadea & Ana Gómez Loscos, 2022. "A New Approach to Dating the Reference Cycle," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 40(1), pages 66-81, January.
    3. Fisher, Mark & Jensen, Mark J., 2019. "Bayesian inference and prediction of a multiple-change-point panel model with nonparametric priors," Journal of Econometrics, Elsevier, vol. 210(1), pages 187-202.
    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. Perricone, Chiara, 2018. "Clustering macroeconomic variables," Structural Change and Economic Dynamics, Elsevier, vol. 44(C), pages 23-33.
    6. Tallman, Ellis W. & Zaman, Saeed, 2020. "Combining survey long-run forecasts and nowcasts with BVAR forecasts using relative entropy," International Journal of Forecasting, Elsevier, vol. 36(2), pages 373-398.
    7. Dimitrios P. Louzis, 2019. "Steady‐state modeling and macroeconomic forecasting quality," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(2), pages 285-314, March.
    8. Dimitrios P. Louzis, 2016. "Macroeconomic forecasting and structural changes in steady states," Working Papers 204, Bank of Greece.

    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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