On Time-Varying VAR models: Estimation, Testing and Impulse Response Analysis

Yayi Yan (), Jiti Gao and Bin Peng ()

No 17/21, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: Vector autoregressive (VAR) models are widely used in practical studies, e.g., forecasting, modelling policy transmission mechanism, and measuring connection of economic agents. To better capture the dynamics, this paper introduces a new class of time-varying VAR models in which the coefficients and covariance matrix of the error innovations are allowed to change smoothly over time. Accordingly, we establish a set of theories, including the impulse responses analyses subject to both of the short-run timing and the long-run restrictions, an information criterion to select the optimal lag, and a Wald-type test to determine the constant coefficients. Simulation studies are conducted to evaluate the theoretical findings. Finally, we demonstrate the empirical relevance and usefulness of the proposed methods through an application to the transmission mechanism of U.S. monetary policy.

Keywords: multivariate dynamic time series; time-varying impulse response; testing for parameter stability (search for similar items in EconPapers)
JEL-codes: C14 C32 E52 (search for similar items in EconPapers)
Pages: 48
Date: 2021
New Economics Papers: this item is included in nep-cwa, nep-ecm, nep-ets, nep-for, nep-mac and nep-ore
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