Pandemic Priors

Danilo Cascaldi-Garcia

No 1352, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The onset of the COVID-19 pandemic and the great lockdown caused macroeconomic variables to display complex patterns that hardly follow any historical behavior. In the context of Bayesian VARs, an off-the-shelf exercise demonstrates how a very low number of extreme pandemic observations bias the estimated persistence of the variables, affecting forecasts and giving a myopic view of the economic effects after a structural shock. I propose an easy and straightforward solution to deal with these extreme episodes, as an extension of the Minnesota Prior with dummy observations by allowing for time dummies. The Pandemic Priors succeed in recovering these historical relationships and the proper identification and propagation of structural shocks.

Keywords: Bayesian VAR; Minnesota Prior; COVID-19; Structural shocks (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 (search for similar items in EconPapers)
Date: 2022-08-03
New Economics Papers: this item is included in nep-ecm and nep-ets
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1352

DOI: 10.17016/IFDP.2022.1352

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