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Autoregressions in Small Samples, Priors about Observables and Initial Conditions

  • Marek Jarocinski
  • Albert Marcet

We propose a benchmark prior for the estimation of vector autoregressions: a prior about initial growth rates of the modelled series. We first show that the Bayesian vs frequentist small sample bias controversy is driven by different default initial conditions. These initial conditions are usually arbitrary and our prior serves to replace them in an intuitive way. To implement this prior we develop a technique for translating priors about observables into priors about parameters. We find that our prior makes a big difference for the estimated persistence of output responses to monetary policy shocks in the United States.

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File URL: http://cep.lse.ac.uk/pubs/download/dp1061.pdf
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1061.

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Date of creation: Jul 2011
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Handle: RePEc:cep:cepdps:dp1061
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  27. Uhlig, Harald, 1994. "On Jeffreys Prior when Using the Exact Likelihood Function," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 633-644, August.
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