The value of structural information in the VAR model

Rodney Strachan and Herman van Dijk

No EI 2003-17, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: Economic policy decisions are often informed by empirical economic analysis. While the decision-maker is usually only interested in good estimates of outcomes, the analyst is interested in estimating the model. Accurate inference on the structural features of a model, such as cointegration, can improve policy analysis as it can improve estimation, inference and forecast efficiency from using that model. However, using a model does not guarantee good estimates of the object of interest and, as it assigns a probability of one to a model and zero to near-by models, takes extreme zero-one account of the "weight of evidence" in the data and the resarcher's uncertainty. By using the uncertainty associated with the structural features in a model set, one obtains policy analysis that is not conditional on the structure of the model and can improve efficiency if the features are appropriately weighted. In this paper tools are presented to allow for unconditional inference on the vector autoregressive (VAR) model. In particular, we employ measures on manifolds to elicit priors on subspaces defined by particular features of the VAR model. The features considered are cointegration, exogeneity, deterministic processes and overidentification. Two applications -- money demand in Australia, and a macroeconomic model of the UK proposed by Garratt, Lee, Persaran, and Shin (2002) are used to illustrate the feasibility of the proposed methods.

Keywords: Laplace approximation; cointegration; exogeneity; model averaging; posterior probabilities; structural modelling (search for similar items in EconPapers)
JEL-codes: C11 C32 C52 (search for similar items in EconPapers)
Date: 2003-06-17
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The Value of Structural Information in the VAR Model (2004)
Working Paper: The Value of Structural Information in the VAR Model (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ems:eureir:1717

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