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Autoregressions in small samples, priors about observables and initial conditions

Listed author(s):
  • Jarociński, Marek
  • Marcet, Albert

We propose a benchmark prior for the estimation of vector autoregressions: a prior about initial growth rates of the modeled 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. JEL Classification: C11, C22, C32

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File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1263.pdf
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Paper provided by European Central Bank in its series Working Paper Series with number 1263.

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Date of creation: Nov 2010
Handle: RePEc:ecb:ecbwps:20101263
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