Nibbering, Didier Paap, Richard van der Wel, Michel
Year of Publication:
Tinbergen Institute Discussion Paper 16-107/III
We propose a Bayesian infinite hidden Markov model to estimate time-varying parameters in a vector autoregressive model. The Markov structure allows for heterogeneity over time while accounting for state-persistence. By modelling the transition distribution as a Dirichlet process mixture model, parameters can vary over potentially an infinite number of regimes. The Dirichlet process however favours a parsimonious model without imposing restrictions on the parameter space. An empirical application demonstrates the ability of the model to capture both smooth and abrupt parameter changes over time, and a real-time forecasting exercise shows excellent predictive performance even in large dimensional VARs.
Time-Varying Parameter Vector Autoregressive Model Semi-parametric Bayesian Inference Dirichlet Process Mixture Model Hidden Markov Chain Monetary Policy Analysis Real-time Forecasting