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Time Varying Dimension Models

Author

Listed:
  • Joshua C C Chan
  • Gary Koop
  • Roberto Leon-Gonzales
  • Rodney W Strachan

Abstract

Time varying parameter (TVP) models have enjoyed an increasing popularity in empirical macroeconomics. However, TVP models are parameter-rich and risk over-fitting unless the dimension of the model is small. Motivated by this worry, this paper proposes several Time Varying Dimension (TVD) models where the dimension of the model can change over time, allowing for the model to automatically choose a more parsimonious TVP representation, or to switch between different parsimonious representations. Our TVD models all fall in the category of dynamic mixture models. We discuss the properties of these models and present methods for Bayesian inference. An application involving US inflation forecasting illustrates and compares the different TVD models. We find out TVD approaches exhibit better forecasting performance than many standard benchmarks and shrink towards parsimonious specifications.

Suggested Citation

  • Joshua C C Chan & Gary Koop & Roberto Leon-Gonzales & Rodney W Strachan, 2011. "Time Varying Dimension Models," CAMA Working Papers 2011-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2011-28
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2021-06/28_chan_koop_leon-gonzales_strachan_2011.pdf
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    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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