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Detecting time variation in the price puzzle: a less informative prior choice for time varying parameter VAR models

Reusens Peter () and Croux Christophe
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Reusens Peter: National Bank of Belgium, De Berlaimontlaan 14, 1000 Brussels, KU Leuven, Belgium
Croux Christophe: EDHEC Business School, Avenue Gustave, Delory 24, 59057 Roubaix, France

Studies in Nonlinear Dynamics & Econometrics, 2017, vol. 21, issue 4, 18

Abstract: This paper compares Bayesian estimators with different prior choices for the time variation of the coefficients of Time Varying Parameter Vector Autoregression models using Monte Carlo simulations. Since the commonly used prior choice only allows for a tiny amount of time variation, less informative priors are proposed. Additional empirical evidence on the time varying response of inflation to an interest rate shock is provided for USA. While a ‘price puzzle’ is detected for the period 1972–1979, the estimated response of inflation to an interest rate shock is negative for most other time periods.

Keywords: inverse Wishart prior; Monte Carlo simulation; price puzzle; time varying parameter; vector autoregression (search for similar items in EconPapers)
Date: 2017
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