Moderate Time-Varying Parameter VARs

Alessandro Celani () and Luca Pedini ()
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Alessandro Celani: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden, https://www.oru.se/english/employee/alessandro_celani
Luca Pedini: Fondazione ENI Enrico Mattei (FEEM), Postal: Fondazione ENI Enrico Mattei (FEEM), Corso Magenta 63, 20123, Milano, Italy, https://www.feem.it/en/chi-siamo/persone/luca-pedini/

No 2025:16, Working Papers from Örebro University, School of Business

Abstract: This paper proposes a parsimonious reparametrization for time-varying parameter models that captures smooth dynamics through a low-dimensional state process combined with B-spline weights. We apply this framework to TVP-VARs, yielding Moderate TVP-VARs that retain the interpretability of standard specifications while mitigating overfitting. Monte Carlo evidence shows faster estimation, lower bias, and strong robustness to knot placement. In U.S. macroeconomic data, moderate specifications recover meaningful long-run movements, produce stable impulse responses and deliver superior density forecasts and predictive marginal likelihoods relative to conventional TVP-VARs, particularly in high-dimensional settings.

Keywords: Time-Varying Parameter models; High-dimensional Vector Autoregressions; Stochastic Volatility; B-splines; Macroeconomic Forecasting (search for similar items in EconPapers)
JEL-codes: C11 C33 C53 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2025-12-02
New Economics Papers: this item is included in nep-ecm and nep-for
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