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Inference in Vector Autoregressive Models with an Informative Prior on the Steady State

Author Info

  • Villani, Mattias

    ()

    (Research Department, Central Bank of Sweden)

Abstract

Vector autoregressions have steadily gained in popularity since their introduction in econometrics 25 years ago. A drawback of the otherwise fairly well developed methodology is the inability to incorporate prior beliefs regarding the system's steady state in a satisfactory way. Such prior information are typically readily available and may be crucial for forecasts at long horizons. This paper develops easily implemented numerical simulation algorithms for analyzing stationary and cointegrated VARs in a parametrization where prior beliefs on the steady state may be adequately incorporated. The analysis is illustrated on macroeconomic data for the Euro area.

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 181.

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Length: 22 pages
Date of creation: 16 Mar 2005
Date of revision:
Handle: RePEc:hhs:rbnkwp:0181
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Sveriges Riksbank, SE-103 37 Stockholm, Sweden

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Keywords: Cointegration; Bayesian inference; Forecasting; Unconditional mean; VARs;

Find related papers by 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
  • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
  • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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  1. Strachan, Rodney W. & Inder, Brett, 2004. "Bayesian analysis of the error correction model," Journal of Econometrics, Elsevier, vol. 123(2), pages 307-325, December.
  2. Villani, Mattias & Warne, Anders, 2003. "Monetary Policy Analysis in a Small Open Economy using Bayesian Cointegrated Structural VARs," Working Paper Series 156, Sveriges Riksbank (Central Bank of Sweden).
  3. Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139, December.
  4. Schotman, Peter & van Dijk, Herman K., 1991. "A Bayesian analysis of the unit root in real exchange rates," Journal of Econometrics, Elsevier, vol. 49(1-2), pages 195-238.
  5. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  6. Kleibergen, F.R. & Paap, R., 1998. "Priors, posteriors and Bayes factors for a Bayesian analysis of cointegration," Econometric Institute Research Papers EI 9821, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  7. John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18.
  8. Lubrano, Michel, 1995. "Testing for unit roots in a Bayesian framework," Journal of Econometrics, Elsevier, vol. 69(1), pages 81-109, September.
  9. Waggoner, Daniel F. & Zha, Tao, 2003. "A Gibbs sampler for structural vector autoregressions," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 349-366, November.
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Cited by:

  1. International Monetary Fund, 2010. "Price Dynamics in China," IMF Working Papers 10/221, International Monetary Fund.
  2. P&aauml;r Österholm & Jeromin Zettelmeyer, 2008. "The Effect of External Conditions on Growth in Latin America," IMF Staff Papers, Palgrave Macmillan, vol. 55(4), pages 595-623, December.
  3. Berger, Helge & Österholm, Pär, 2008. "Does money growth granger-cause inflation in the Euro Area? Evidence from output-of-sample forecasts using Bayesian VARs," Discussion Papers 2008/10, Free University Berlin, School of Business & Economics.
  4. Pär Österholm & Helge Berger, 2008. "Does Money Growth Granger-Cause Inflation in the Euro Area? Evidence from Out-of-Sample Forecasts Using Bayesian VARs," IMF Working Papers 08/53, International Monetary Fund.
  5. Malin Adolfson & Michael K. Andersson & Jesper Lindé & Mattias Villani & Anders Vredin, 2007. "Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 111-144, December.
  6. Mattias Villani, 2009. "Steady-state priors for vector autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(4), pages 630-650.

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