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Streamlining Time-varying VAR with a Factor Structure in the Parameters

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Abstract

I introduce a factor structure on the parameters of a Bayesian TVP-VAR to reduce the dimension of the model's state space. To further limit the scope of over-fitting the estimation of the factor loadings uses a new generation of shrinkage priors. A Monte Carlo study illustrates the ability of the proposed sampler to well distinguish between time-varying and constant parameters. In an application with Swiss data the model proves useful to capture changes in the economy's dynamics due to the lower bound on nominal interest rates.

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  • Simon Beyeler, 2019. "Streamlining Time-varying VAR with a Factor Structure in the Parameters," Working Papers 19.03, Swiss National Bank, Study Center Gerzensee.
    • Handle: RePEc:szg:worpap:1903
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    References listed on IDEAS

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    Cited by:

    1. Sophie Altermatt & Simon Beyeler, 2018. "Shall We Twist?," Diskussionsschriften dp1825, Universitaet Bern, Departement Volkswirtschaft.

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