Flexible prior beliefs on impulse responses in Bayesian vector autoregressive models

Fabio Canova, Andrzej Kocięcki and Michele Piffer

No 18992, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a prior for VAR coefficients that allows for flexible non-dogmatic beliefs on the shape of the structural impulse responses. We achieve this using an alternative setting of the moments of a Normal prior for the autoregressive parameters. Posterior computations are no more demanding than existing prior specifications; yet the methodology offers a tool for Bayesian shrinkage over key outputs of the model. Introducing the prior belief that monetary policy shocks generate temporary but persistent effects leads to a hump-shaped response of GDP, with the peak occurring between twelve and eighteen months after the shock.

Keywords: Non-dogmatic beliefs; Impulse responses; Monetary policy; Identification; Structural shocks (search for similar items in EconPapers)
JEL-codes: C32 E52 (search for similar items in EconPapers)
Date: 2024-04
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