Large Time-Varying Parameter Vars: A Non-Parametric Approach

63 Pages Posted: 28 Aug 2017

See all articles by George Kapetanios

George Kapetanios

King's College, London

Massimiliano Giuseppe Marcellino

European University Institute; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Fabrizio Venditti

Bank of Italy

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Date Written: June 16, 2017

Abstract

In this paper we introduce a non-parametric estimation method for a large Vector Autoregression (VAR) with time-varying parameters. The estimators and their asymptotic distributions are available in closed form. This makes the method computationally efficient and capable of handling information sets as large as those typically handled by factor models and Factor Augmented VARs (FAVAR). When applied to the problem of forecasting key macroeconomic variables, the method outperforms constant parameter benchmarks and large (parametric) Bayesian VARs with time-varying parameters. The tool can also be used for structural analysis. As an example, we study the time-varying effects of oil price innovations on sectoral U.S. industrial output. We find that durable consumer goods and durable materials (which together account for slightly more than one fifth of total industrial output) play a key role in explaining the changing interaction between unexpected oil price increases and U.S. business cycle fluctuations.

Keywords: large VARs, time-varying parameters, non-parametric estimation, forecasting

JEL Classification: C14, C32, C53, C55

Suggested Citation

Kapetanios, George and Marcellino, Massimiliano and Venditti, Fabrizio, Large Time-Varying Parameter Vars: A Non-Parametric Approach (June 16, 2017). Bank of Italy Temi di Discussione (Working Paper) No. 1122, Available at SSRN: https://ssrn.com/abstract=3026027 or http://dx.doi.org/10.2139/ssrn.3026027

George Kapetanios

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

Massimiliano Marcellino

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Fabrizio Venditti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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