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Autoregressions in Small Samples, Priors about Observables and Initial Conditions

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  • Marek Jarocinski
  • Albert Marcet

Abstract

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.

Suggested Citation

  • Marek Jarocinski & Albert Marcet, 2011. "Autoregressions in Small Samples, Priors about Observables and Initial Conditions," CEP Discussion Papers dp1061, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1061
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Gustavo Canavire-Bacarreza & Jorge Martínez-Vázquez & Violeta Vulovic, 2013. "Taxation and Economic Growth in Latin America," IDB Publications (Working Papers) 4583, Inter-American Development Bank.
    2. Marek Jarocinski & Albert Marcet, 2013. "Priors about Observables in Vector Autoregressions," UFAE and IAE Working Papers 929.13, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    3. Domenico Giannone & Michele Lenza & Giorgio E. Primiceri, 2015. "Prior Selection for Vector Autoregressions," The Review of Economics and Statistics, MIT Press, vol. 97(2), pages 436-451, May.
    4. Giannone, Domenico & Lenza, Michele & Primiceri, Giorgio E, 2016. "Priors for the Long Run," CEPR Discussion Papers 11261, C.E.P.R. Discussion Papers.
    5. Lomivorotov, Rodion, 2015. "Bayesian estimation of monetary policy in Russia," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 41-63.
    6. Meldrum, Andrew & Roberts-Sklar, Matt, 2015. "Long-run priors for term structure models," Bank of England working papers 575, Bank of England.
    7. Michal Andrle & Jaromir Benes, 2013. "System Priors; Formulating Priors about DSGE Models' Properties," IMF Working Papers 13/257, International Monetary Fund.

    More about this item

    Keywords

    Vector autoregression; initial condition; bayesian estimation; prior about growth rate; monetary policy shocks; small sample distribution; bias correction;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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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