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Priors for the long run

Author

Listed:
  • Domenico Giannone
  • Michele Lenza
  • Giorgio E. Primiceri

Abstract

We propose a class of prior distributions that discipline the long-run predictions of vector autoregressions (VARs). These priors can be naturally elicited using economic theory, which provides guidance on the joint dynamics of macroeconomic time series in the long run. Our priors for the long run are conjugate, and can thus be easily implemented using dummy observations and combined with other popular priors. In VARs with standard macroeconomic variables, a prior based on the long-run predictions of a wide class of theoretical models yields substantial improvements in the forecasting performance.

Suggested Citation

  • Domenico Giannone & Michele Lenza & Giorgio E. Primiceri, 2017. "Priors for the long run," Staff Reports 832, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:832
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    More about this item

    Keywords

    Bayesian vector autoregressions; forecasting; overfitting; initial conditions; hierarchical models;
    All these keywords.

    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
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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