Estimating (Markov-Switching) VAR Models Without Gibbs Sampling: A Sequential Monte Carlo Approach

50 Pages Posted: 22 Nov 2014 Last revised: 10 Jan 2015

See all articles by Mark Bognanni

Mark Bognanni

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Edward Herbst

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: November 14, 2014

Abstract

Vector autoregressions with Markov-switching parameters (MS-VARs) offer dramatically better data fit than their constant-parameter predecessors. However, computational complications, as well as negative results about the importance of switching in parameters other than shock variances, have caused MS-VARs to see only sparse usage. For our first contribution, we document the effectiveness of Sequential Monte Carlo (SMC) algorithms at estimating MSVAR posteriors. Relative to multi-step, model-specific MCMC routines, SMC has the advantages of being simpler to implement, readily parallelizable, and unconstrained by reliance on convenient relationships between prior and likelihood. For our second contribution, we exploit SMC’s flexibility to demonstrate that the use of priors with superior data fit alters inference about the presence of time variation in macroeconomic dynamics. Using the same data as Sims, Waggoner, and Zha (2008), we provide evidence of recurrent episodes characterized by a fl at Phillips Curve.

Keywords: Vector Autoregressions, Sequential Monte Carlo, Regime-Switching Models, Bayesian Analysis

JEL Classification: C11, C15, C32, C52, E3, E4, E5

Suggested Citation

Bognanni, Mark and Herbst, Edward, Estimating (Markov-Switching) VAR Models Without Gibbs Sampling: A Sequential Monte Carlo Approach (November 14, 2014). FRB of Cleveland Working Paper No. 14-27. Available at SSRN: https://ssrn.com/abstract=2529194 or http://dx.doi.org/10.2139/ssrn.2529194

Mark Bognanni (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Edward Herbst

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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