Prior parameter uncertainty: Some implications for forecasting and policy analysis with VAR models

John Robertson and Ellis Tallman

No 99-13, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: Models used for policy analysis should generate reliable unconditional forecasts as well as policy simulations (conditional forecasts) that are based on a structural model of the economy. Vector autoregression (VAR) models have been criticized for having inaccurate forecasts as well as being difficult to interpret in the context of an underlying economic model. In this paper, we examine how the treatment of prior uncertainty about parameter values can affect forecasting accuracy and the interpretation of identified structural VAR models. ; Typically, VAR models are specified with long lag orders and a diffuse prior about the unrestricted coefficients. We find evidence that alternatives that emphasize nonstationary aspects of the data as well as parsimony in parameterization have better out-of-sample forecast performance and smoother and more persistent responses to a given exogenous monetary policy change than do unrestricted VARs.

Keywords: Forecasting; Vector autoregression; Econometric models (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-fin
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Citations: View citations in EconPapers (8)

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