Pandemic Priors

25 Pages Posted: 26 Aug 2022

See all articles by Danilo Cascaldi-Garcia

Danilo Cascaldi-Garcia

Board of Governors of the Federal Reserve System

Date Written: August, 2022


The onset of the COVID-19 pandemic and the great lockdown caused macroeconomic variables to display complex patterns that hardly follow any historical behavior. In the context of Bayesian VARs, an off-the-shelf exercise demonstrates how a very low number of extreme pandemic observations bias the estimated persistence of the variables, affecting forecasts and giving a myopic view of the economic effects after a structural shock. I propose an easy and straightforward solution to deal with these extreme episodes, as an extension of the Minnesota Prior with dummy observations by allowing for time dummies. The Pandemic Priors succeed in recovering these historical relationships and the proper identification and propagation of structural shocks.

Keywords: Bayesian VAR, Minnesota Prior, COVID-19, Structural shocks

JEL Classification: C32, E32, E44

Suggested Citation

Cascaldi-Garcia, Danilo, Pandemic Priors (August, 2022). International Finance Discussion Paper No. 1352, Available at SSRN: or

Danilo Cascaldi-Garcia (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

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