Bayesian Averaging over Many Dynamic Model Structures with Evidence on the Great Ratios and Liquidity Trap Risk

Tinbergen Institute Discussion Paper No. 08-096/4

52 Pages Posted: 19 Oct 2008

See all articles by Rodney W. Strachan

Rodney W. Strachan

University of Queensland - School of Economics

H. K. van Dijk

Tinbergen Institute; Econometric Institute

Date Written: October 13, 2008

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 USA 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.

Keywords: Posterior probability, Grassman manifold, Orthogonal group, Cointegration, Model averaging, Stochastic trend, Impulse response, Vector autoregressive model, Great Ratios, Liquidity trap

JEL Classification: C11, C32, C52

Suggested Citation

Strachan, Rodney W. and van Dijk, Herman K., Bayesian Averaging over Many Dynamic Model Structures with Evidence on the Great Ratios and Liquidity Trap Risk (October 13, 2008). Tinbergen Institute Discussion Paper No. 08-096/4, Available at SSRN: https://ssrn.com/abstract=1283567 or http://dx.doi.org/10.2139/ssrn.1283567

Rodney W. Strachan (Contact Author)

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

Herman K. Van Dijk

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Burg. Oudlaan 50
Amsterdam/Rotterdam, 1082 MS
Netherlands
+31104088955 (Phone)
+31104089031 (Fax)

HOME PAGE: http://people.few.eur.nl/hkvandijk/

Econometric Institute ( email )

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