Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2008-10-10
Number: 08-096/4
Author-Name: Rodney W. Strachan
Author-Email: r.strachan@uq.edu.au
Author-Workplace-Name: The University of Queensland, Australia
Author-Name: Herman K. van Dijk
Author-Email: hkvandijk@few.eur.nl
Author-Workplace-Name: Erasmus University Rotterdam, the Netherlands
Title: Bayesian Averaging over Many Dynamic Model Structures with Evidence on the Great Ratios and Liquidity Trap Risk
Abstract: A Bayesian model averaging procedure is presented that makes use of a finite mixture of many model structures within the class of vector autoregressive (VAR) processes. It is applied to two empirical issues. First, stability of the Great Ratios in U.S. macro-economic time series is investigated, together with the effect of permanent shocks on business cycles. Second, the linear 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 U.S.A. and Japan is evaluated. Although this risk found to be reasonably high, we find only mild evidence that the monetary policy transmission mechanism is different and that central banks consider the expected cost of a liquidity trap in policy setting. Posterior probabilities of different models are evaluated using Markov chain Monte Carlo techniques.
Classification-JEL: C11, C32, C52
Keywords: Posterior probability; Grassman manifold; Orthogonal group; Cointegration; Model averaging; Stochastic trend; Impulse response;Vector autoregressive model; Great Ratios; Liquidity trap
File-Url: https://papers.tinbergen.nl/08096.pdf
File-Format: application/pdf
File-Size: 517617 bytes
Handle: RePEc:tin:wpaper:20080096