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Flexible prior beliefs on impulse responses in Bayesian vector autoregressive models

Author

Listed:
  • Canova, Fabio
  • Kociecki, Andrzej
  • Piffer, Michele

Abstract

We develop a prior for VAR coefficients that allows for flexible non-dogmatic beliefs on the shape of the structural impulse responses. We achieve this using an alternative setting of the moments of a Normal prior for the autoregressive parameters. Posterior computations are no more demanding than existing prior specifications; yet the methodology offers a tool for Bayesian shrinkage over key outputs of the model. Introducing the prior belief that monetary policy shocks generate temporary but persistent effects leads to a hump-shaped response of GDP, with the peak occurring between twelve and eighteen months after the shock.

Suggested Citation

  • Canova, Fabio & Kociecki, Andrzej & Piffer, Michele, 2024. "Flexible prior beliefs on impulse responses in Bayesian vector autoregressive models," CEPR Discussion Papers 18992, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18992
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    More about this item

    Keywords

    Non-dogmatic beliefs; Impulse responses; Monetary policy; Identification; Structural shocks;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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