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Forecasting With High Dimensional Panel VARs

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  • Gary Koop
  • Dimitris Korobilis

Abstract

In this paper, we develop econometric methods for estimating large Bayesian timevarying parameter panel vector autoregressions (TVP-PVARs) and use these methods to forecast inflation for euro area countries. Large TVP-PVARs contain huge numbers of parameters which can lead to over-parameterization and computational concerns. To overcome these concerns, we use hierarchical priors which reduce the dimension of the parameter vector and allow for dynamic model averaging or selection over TVP-PVARs of different dimension and different priors. We use forgetting factor methods which greatly reduce the computational burden. Our empirical application shows substantial forecast improvements over plausible alternatives.

Suggested Citation

  • Gary Koop & Dimitris Korobilis, 2015. "Forecasting With High Dimensional Panel VARs," Working Papers 2015_25, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2015_25
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    3. Deborah Gefang & Gary Koop & Aubrey Poon, 2019. "Variational Bayesian Inference in Large Vector Autoregressions with Hierarchical Shrinkage," Discussion Papers in Economics 19/05, Division of Economics, School of Business, University of Leicester.
    4. Joan Costa-Font & Cristina Vilaplana-Prieto, 2023. "‘Investing’ in care for old age? An examination of long-term care expenditure dynamics and its spillovers," Empirical Economics, Springer, vol. 64(1), pages 1-30, January.
    5. Malovaná, Simona & Frait, Jan, 2017. "Monetary policy and macroprudential policy: Rivals or teammates?," Journal of Financial Stability, Elsevier, vol. 32(C), pages 1-16.
    6. Camehl, Annika, 2023. "Penalized estimation of panel vector autoregressive models: A panel LASSO approach," International Journal of Forecasting, Elsevier, vol. 39(3), pages 1185-1204.
    7. Schnücker, A.M., 2019. "Penalized Estimation of Panel Vector Autoregressive Models," Econometric Institute Research Papers EI-2019-33, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    8. Beckmann, Joscha & Czudaj, Robert, 2017. "Capital flows and GDP in emerging economies and the role of global spillovers," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 140-163.
    9. Francesco Simone Lucidi, 2023. "The misalignment of fiscal multipliers in Italian regions," Regional Studies, Taylor & Francis Journals, vol. 57(10), pages 2073-2086, October.
    10. Christou, Christina & Cunado, Juncal & Gupta, Rangan & Hassapis, Christis, 2017. "Economic policy uncertainty and stock market returns in PacificRim countries: Evidence based on a Bayesian panel VAR model," Journal of Multinational Financial Management, Elsevier, vol. 40(C), pages 92-102.
    11. Camehl, Annika & von Schweinitz, Gregor, 2023. "What explains international interest rate co-movement?," IWH Discussion Papers 3/2023, Halle Institute for Economic Research (IWH), revised 2023.
    12. Bebonchu Atems, 2020. "Identifying the Dynamic Effects of Income Inequality on Crime," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(4), pages 751-782, August.
    13. David Martinez-Miera & Rafael Repullo, 2019. "Monetary Policy, Macroprudential Policy, and Financial Stability," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 809-832, August.
    14. Florian Huber & Tam'as Krisztin & Michael Pfarrhofer, 2018. "A Bayesian panel VAR model to analyze the impact of climate change on high-income economies," Papers 1804.01554, arXiv.org, revised Feb 2021.
    15. Yu Bai & Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2022. "Macroeconomic forecasting in a multi‐country context," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(6), pages 1230-1255, September.
    16. Florian Huber & Gary Koop, 2023. "Subspace shrinkage in conjugate Bayesian vector autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(4), pages 556-576, June.
    17. Laura Liu & Christian Matthes & Katerina Petrova, 2022. "Monetary Policy Across Space and Time," Advances in Econometrics, in: Essays in Honour of Fabio Canova, volume 44, pages 37-64, Emerald Group Publishing Limited.
    18. Sheereen Fauzel* & Boopen Seetanah & RV Sannassee, 2015. "Foreign direct investment and welfare nexus in sub Saharan Africa," Journal of Developing Areas, Tennessee State University, College of Business, vol. 49(4), pages 271-283, October-D.
    19. Marcellino, Massimiliano & Foroni, Claudia & Casarin, Roberto & Ravazzolo, Francesco, 2017. "Uncertainty Through the Lenses of A Mixed-Frequency Bayesian Panel Markov Switching Model," CEPR Discussion Papers 12339, C.E.P.R. Discussion Papers.
    20. Beechey, Meredith & Österholm, Pär & Poon, Aubrey, 2023. "Estimating the US trend short-term interest rate," Finance Research Letters, Elsevier, vol. 55(PA).
    21. Joseph P. Byrne & Prince Asare Vitenu-Sackey, 2024. "The Macroeconomic Impact of Global and Country-Specific Climate Risk," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(3), pages 655-682, March.
    22. Christou, Christina & Gupta, Rangan & Hassapis, Christis, 2017. "Does economic policy uncertainty forecast real housing returns in a panel of OECD countries? A Bayesian approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 50-60.
    23. Florian Huber & Michael Pfarrhofer & Philipp Piribauer, 2020. "A multi‐country dynamic factor model with stochastic volatility for euro area business cycle analysis," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(6), pages 911-926, September.
    24. Alexey Ponomarenko & Anna Rozhkova & Sergei Seleznev, 2017. "Macro-financial linkages: the role of liquidity dependence," Bank of Russia Working Paper Series wps24, Bank of Russia.
    25. Davidson, Sharada Nia, 2020. "Interdependence or contagion: A model switching approach with a focus on Latin America," Economic Modelling, Elsevier, vol. 85(C), pages 166-197.

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    More about this item

    Keywords

    Panel VAR; inflation forecasting; Bayesian; time-varying parameter model;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • 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

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