Bayesian Methods for Empirical Macroeconomics with Big Data

Review of Economic Analysis 9 (1), 33-56

24 Pages Posted: 12 Jan 2018

See all articles by Gary Koop

Gary Koop

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

Date Written: 2017

Abstract

Bayesian econometric methods are increasingly popular in empirical macroeconomics. They have been particularly popular among macroeconomists working with Big Data (where the number of variables under study is large relative to the number of observations). This paper, which is based on a keynote address at the Rimini Centre for Economic Analysis' 2016 Money-Macro-Finance Workshop, explains why this is so. It discusses the problems that arise with conventional econometric methods and how Bayesian methods can successfully overcome them either through use of prior shrinkage or through model averaging. The discussion is kept at a relatively non-technical level, providing the main ideas underlying and motivation for the models and methods used. It begins with single-equation models (such as regression) with many explanatory variables, then moves on to multiple equation models (such as Vector Autoregressive, VAR, models) before tacking the challenge caused by parameter change (e.g. changes in VAR coefficients or volatility). It concludes with an example of how the Bayesian can address all these challenges in a large multi-country VAR involving 133 variables: 7 variables for each of 19 countries.

Keywords: multivariate time series, vector autoregression, state space model

JEL Classification: C11, C32, C53

Suggested Citation

Koop, Gary, Bayesian Methods for Empirical Macroeconomics with Big Data (2017). Review of Economic Analysis 9 (1), 33-56. Available at SSRN: https://ssrn.com/abstract=3098649

Gary Koop (Contact Author)

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

100 Cathedral Street
Glasgow G4 0LN
United Kingdom

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