Quantitative Economics
Journal Of The Econometric Society
Edited by: StÊphane Bonhomme ⢠Print ISSN: 1759-7323 ⢠Online ISSN: 1759-7331
Edited by: StÊphane Bonhomme ⢠Print ISSN: 1759-7323 ⢠Online ISSN: 1759-7331
Quantitative Economics: Jul, 2022, Volume 13, Issue 3
Joshua C. C. Chan
Large Bayesian VARs are now widely used in empirical macroeconomics. One popular shrinkage prior in this setting is the natural conjugate prior as it facilitates posterior simulation and leads to a range of useful analytical results. This is, however, at the expense of modeling flexibility, as it rules out crossâvariable shrinkage, that is, shrinking coefficients on lags of other variables more aggressively than those on own lags. We develop a prior that has the best of both worlds: it can accommodate crossâvariable shrinkage, while maintaining many useful analytical results, such as a closedâform expression of the marginal likelihood. This new prior also leads to fast posterior simulationâfor a BVAR with 100 variables and 4 lags, obtaining 10,000 posterior draws takes less than half a minute on a standard desktop. We demonstrate the usefulness of the new prior via a structural analysis using a 15âvariable VAR with sign restrictions to identify 5 structural shocks.
Shrinkage prior marginal likelihood optimal hyperparameters structural VAR sign restrictions C11 C52 C55 E44December 4, 2024