Time Varying Dimension Models

27 Pages Posted: 11 Aug 2011

See all articles by Joshua C. C. Chan

Joshua C. C. Chan

University of Technology Sydney (UTS) - UTS Business School; Purdue University

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics

Roberto Leon-Gonzalez

National Graduate Institute for Policy Studies (GRIPS)

Rodney W. Strachan

University of Queensland - School of Economics

Date Written: August 2011

Abstract

Time varying parameter (TVP) models have enjoyed an increasing popularity in empirical macroeconomics. However, TVP models are parameter-rich and risk over-fitting unless the dimension of the model is small. Motivated by this worry, this paper proposes several Time Varying Dimension (TVD) models where the dimension of the model can change over time, allowing for the model to automatically choose a more parsimonious TVP representation, or to switch between different parsimonious representations. Our TVD models all fall in the category of dynamic mixture models. We discuss the properties of these models and present methods for Bayesian inference. An application involving US inflation forecasting illustrates and compares the different TVD models. We find our TVD approaches exhibit better forecasting performance than many standard benchmarks and shrink towards parsimonious specifications.

Suggested Citation

Chan, Joshua C. C. and Koop, Gary and Leon-Gonzalez, Roberto and Strachan, Rodney W., Time Varying Dimension Models (August 2011). Available at SSRN: https://ssrn.com/abstract=1908011 or http://dx.doi.org/10.2139/ssrn.1908011

Joshua C. C. Chan

University of Technology Sydney (UTS) - UTS Business School ( email )

Sydney
Australia

Purdue University

West Lafayette, IN 47907-1310
United States

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom

Roberto Leon-Gonzalez

National Graduate Institute for Policy Studies (GRIPS) ( email )

7-22-1 Roppongi, Minato-Ku
Tokyo 106-8677, Tokyo 106-8677
Japan

Rodney W. Strachan (Contact Author)

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

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