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Bayesian model averaging in vector autoregressive processes with an investigation of stability of the US great ratios and risk of a liquidity trap in the USA, UK and Japan

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  • Strachan, R.W.
  • van Dijk, H.K.

Abstract

A Bayesian model averaging procedure is presented within the class of vector autoregressive (VAR) processes and applied to two empirical issues. First, stability of the "Great Ratios" in U.S. macro-economic time series is investigated, together with the presence and e¤ects of permanent shocks. Measures on manifolds are employed in order to elicit uniform priors on subspaces defned by particular structural features of linear VARs. Second, the VAR model is extended to include a smooth transition function in a (monetary) equation and stochastic volatility in the disturbances. The risk of a liquidity trap in the USA, UK and Japan is evaluated, together with the expected cost of a policy adjustment of central banks. Posterior probabilities of different models are evaluated using Markov chain Monte Carlo techniques.

Suggested Citation

  • Strachan, R.W. & van Dijk, H.K., 2007. "Bayesian model averaging in vector autoregressive processes with an investigation of stability of the US great ratios and risk of a liquidity trap in the USA, UK and Japan," Econometric Institute Research Papers EI 2007-11, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  • Handle: RePEc:ems:eureir:9303
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    Cited by:

    1. Gareth W. Peters & Balakrishnan Kannan & Ben Lasscock & Chris Mellen, 2010. "Model Selection and Adaptive Markov chain Monte Carlo for Bayesian Cointegrated VAR model," Papers 1004.3830, arXiv.org.
    2. Korobilis, Dimitris, 2008. "Forecasting in vector autoregressions with many predictors," MPRA Paper 21122, University Library of Munich, Germany.
    3. Justyna Wróblewska, 2009. "Bayesian Model Selection in the Analysis of Cointegration," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 1(1), pages 57-69, March.
    4. Ravazzolo, F. & van Dijk, H.K. & Verbeek, M.J.C.M., 2007. "Predictive gains from forecast combinations using time-varying model weights," Econometric Institute Research Papers EI 2007-26, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    5. Justyna Wróblewska, 2011. "Bayesian Analysis of Weak Form Reduced Rank Structure in VEC Models," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 3(3), pages 169-186, September.

    More about this item

    Keywords

    Grassman manifold; cointegration; great ratios; impulse response; liquidity trap; model averaging; orthogonal group; posterior probability; stochastic trend; vector autoregressive model;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • 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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