Bayesian model averaging in vector autoregressive processes with an investigation of stability of the US great ratios and risk of a liquidity trap in the USA, UK and Japan

Rodney Strachan and Herman van Dijk

No EI 2007-11, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: A Bayesian model averaging procedure is presented within the class of vector autoregressive (VAR) processes and applied to two empirical issues. First, stability of the "Great Ratios" in U.S. macro-economic time series is investigated, together with the presence and e¤ects of permanent shocks. Measures on manifolds are employed in order to elicit uniform priors on subspaces defned by particular structural features of linear VARs. Second, the VAR model is extended to include a smooth transition function in a (monetary) equation and stochastic volatility in the disturbances. The risk of a liquidity trap in the USA, UK and Japan is evaluated, together with the expected cost of a policy adjustment of central banks. Posterior probabilities of different models are evaluated using Markov chain Monte Carlo techniques.

Keywords: Grassman manifold; cointegration; great ratios; impulse response; liquidity trap; model averaging; orthogonal group; posterior probability; stochastic trend; vector autoregressive model (search for similar items in EconPapers)
JEL-codes: C11 C32 (search for similar items in EconPapers)
Date: 2007-03-25
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Citations: View citations in EconPapers (11)

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Working Paper: Bayesian Model Averaging in Vector Autoregressive Processes with an Investigation of Stability of the US Great Ratios and Risk of a Liquidity Trap in the USA, UK and Japan
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