Steady-state priors and Bayesian variable selection in VAR forecasting

Dimitrios Louzis

No 195, Working Papers from Bank of Greece

Abstract: This study proposes methods for estimating Bayesian vector autoregressions (VARs) with an automatic variable selection and an informative prior on the unconditional mean or steady-state of the system. We show that extant Gibbs sampling methods for Bayesian variable selection can be efficiently extended to incorporate prior beliefs on the steady-state of the economy. Empirical analysis, based on three major US macroeconomic time series, indicates that the out-of-sample forecasting accuracy of a VAR model is considerably improved when it combines both variable selection and steady-state prior information.

Keywords: Bayesian VAR; Steady states; Variable selection; Macroeconomic forecasting (search for similar items in EconPapers)
JEL-codes: C32 (search for similar items in EconPapers)
Pages: 37
Date: 2015-07
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-ore
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Citations: View citations in EconPapers (1)

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Journal Article: Steady-state priors and Bayesian variable selection in VAR forecasting (2016)
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