Priors about Observables in Vector Autoregressions

Marek Jarociński and Albert Marcet

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: Standard practice in Bayesian VARs is to formulate priors on the autoregres- sive parameters, but economists and policy makers actually have priors about the behavior of observable variables. We show how this kind of prior can be used in a VAR under strict probability theory principles. We state the inverse problem to be solved and we propose a numerical algorithm that works well in practical situations with a very large number of parameters. We prove various convergence theorems for the algorithm. As an application, we first show that the results in Christiano et al. (1999) are very sensitive to the introduction of various priors that are widely used. These priors turn out to be associated with undesirable priors on observables. But an empirical prior on observables helps clarify the relevance of these estimates: we find much higher persistence of out- put responses to monetary policy shocks than the one reported in Christiano et al. (1999) and a significantly larger total effect.

Keywords: Vector Autoregression; Bayesian Estimation; Prior about Observables; Inverse Problem; Monetary Policy Shocks (search for similar items in EconPapers)
JEL-codes: C11 C22 C32 (search for similar items in EconPapers)
Pages: 36
Date: 2013-03-18
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Priors about observables in vector autoregressions (2019)
Working Paper: Priors about Observables in Vector Autoregressions (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:929.13

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