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General-to-Specific Model Selection Procedures for Structural Vector Autoregressions

  • Hans-Martin Krolzig

    ()

    (Department of Economics, and Nuffield College, Oxford University)

Structural vector autoregressive (SVAR) models have emerged as a dominant research strategy in empirical macroeconomics, but suffer from the large number of parameters employed and the resulting estimation uncertainty associated with their impulse responses. In this paper we propose general-to-specific model selection procedures to overcome these limitations. After showing that single-equation procedures are efficient for the reduction of the SVAR, but generally not for the reduction of its reduced form, the proposed reduction procedure is computer-automated using PcGets and its small-sample properties are evaluated in a realistic Monte Carlo experiment. The model selection procedure is shown to recover the DGP specification from a large unrestricted SVAR model with controlled size and power. The impulse responses generated by the selected SVAR are compared to those of the unrestricted and reduced VAR and found to be more precise and accurate. The proposed reduction strategy is then applied to the US monetary system considered by Christiano, Eichenbaum and Evans (1996). Although the selection process is hampered by the misspecification of the unrestricted VAR, the results are consistent with the Monte Carlo and question the validity of the impulses responses generated by the full system.

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File URL: http://www.nuff.ox.ac.uk/economics/papers/2003/W15/hmk03a.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2003-W15.

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Length: 24 pages
Date of creation: 01 Mar 2003
Date of revision:
Handle: RePEc:nuf:econwp:0315
Contact details of provider: Web page: http://www.nuff.ox.ac.uk/economics/

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  1. Kevin D. Hoover & Stephen J. Perez, 1999. "Data mining reconsidered: encompassing and the general-to-specific approach to specification search," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 167-191.
  2. Hendry, David F & Hans-Martin Krolzig, 2003. "The Properties of Automatic Gets Modelling," Royal Economic Society Annual Conference 2003 105, Royal Economic Society.
  3. Hans-Martin Krolzig, 2001. "General--to--Specific Reductions of Vector Autoregressive Processes," Computing in Economics and Finance 2001 164, Society for Computational Economics.
  4. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  5. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
  6. Hans-Martin Krolzig & Ralf Brüggemann, 2003. "Comparison of Model Reduction Methods for VAR Processes," Economics Series Working Papers 2003-W13, University of Oxford, Department of Economics.
  7. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  8. Kevin Hoover & Selva Demiralp, 2003. "Searching for the Causal Structure of a Vector Autoregression," Working Papers 33, University of California, Davis, Department of Economics.
  9. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  10. Swanson, N.R. & Granger, C.W.J., 1994. "Impulse Response Functions Based on Causal Approach to Residual Orthogonalization in Vector Autoregressions," Papers 9-94-1, Pennsylvania State - Department of Economics.
  11. Krolzig, Hans-Martin & Peter Flaschel, 2003. "Wage and Price Phillips Curves," Royal Economic Society Annual Conference 2003 128, Royal Economic Society.
  12. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  13. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  14. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
  15. Hendry, David F, 1980. "Econometrics-Alchemy or Science?," Economica, London School of Economics and Political Science, vol. 47(188), pages 387-406, November.
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  17. Hendry, David F. & Mizon, Grayham E., 2001. "Reformulating empirical macro-econometric modelling," Discussion Paper Series In Economics And Econometrics 0104, Economics Division, School of Social Sciences, University of Southampton.
  18. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
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