IDENTIFICATION ISSUES IN LIMITED‐INFORMATION BAYESIAN ANALYSIS OF STRUCTURAL MACROECONOMIC MODELS

Frank Kleibergen and Sophocles Mavroeidis

Journal of Applied Econometrics, 2014, vol. 29, issue 7, 1183-1209

Abstract: The likelihood of the parameters in structural macroeconomic models typically has non‐identification regions over which it is constant. When sufficiently diffuse priors are used, the posterior piles up in such non‐identification regions. Use of informative priors can lead to the opposite, so both can generate spurious inference. We propose priors/posteriors on the structural parameters that are implied by priors/posteriors on the parameters of an embedding reduced‐form model. An example of such a prior is the Jeffreys prior. We use it to conduct Bayesian limited‐information inference on the new Keynesian Phillips curve with a VAR reduced form for US data. Copyright © 2014 John Wiley & Sons, Ltd.

Date: 2014
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