Stochastic Model Specification Search for Time-Varying Parameter VARs
Eric Eisenstat (),
Joshua Chan and
Rodney Strachan ()
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Eric Eisenstat: Faculty of Business Administration, University of Bucharest, Romania; RIMIR
Working Paper series from Rimini Centre for Economic Analysis
This article develops a new econometric methodology for performing stochastic model specification search (SMSS) in the vast model space of time-varying parameter VARs with stochastic volatility and correlated state transitions. This is motivated by the concern of over-fitting and the typically imprecise inference in these highly parameterized models. For each VAR coefficient, this new method automatically decides whether it is constant or time-varying. Moreover, it can be used to shrink an otherwise unrestricted time-varying parameter VAR to a stationary VAR, thus providing an easy way to (probabilistically) impose stationarity in time-varying parameter models. We demonstrate the effectiveness of the approach with a topical application, where we investigate the dynamic effects of structural shocks in government spending on U.S. taxes and GDP during a period of very low interest rates.
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Journal Article: Stochastic Model Specification Search for Time-Varying Parameter VARs (2016)
Working Paper: Stochastic Model Specification Search for Time-Varying Parameter VARs (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:44_14
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