Have Standard VARs Remained Stable Since the Crisis?

57 Pages Posted: 12 Sep 2014

See all articles by Knut Are Aastveit

Knut Are Aastveit

Norges Bank

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Todd E. Clark

Federal Reserve Bank of Cleveland

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: September 11, 2014

Abstract

Small or medium-scale VARs are commonly used in applied macroeconomics for forecasting and evaluating the shock transmission mechanism. This requires the VAR parameters to be stable over the evaluation and forecast sample, or to explicitly consider parameter time variation. The earlier literature focused on whether there were sizable parameter changes in the early 1980s, in either the conditional mean or variance parameters, and in the subsequent period till the beginning of the new century. In this paper we conduct a similar analysis but focus on the effects of the recent crisis. Using a range of techniques, we provide substantial evidence against parameter stability. The evolution of the unemployment rate seems particularly different relative to its past behavior. We then discuss and evaluate alternative methods to handle parameter instability in a forecasting context. While none of the methods clearly emerges as best, some techniques turn out to be useful to improve the forecasting performance.

Keywords: Bayesian VAR, Forecasting, Time-varying parameters, Stochastic volatility

JEL Classification: E17, C11, C33, C53

Suggested Citation

Aastveit, Knut Are and Carriero, Andrea and Clark, Todd E. and Marcellino, Massimiliano, Have Standard VARs Remained Stable Since the Crisis? (September 11, 2014). FRB of Cleveland Working Paper No. 14-11, Available at SSRN: https://ssrn.com/abstract=2495016 or http://dx.doi.org/10.2139/ssrn.2495016

Knut Are Aastveit

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy
(39 02) 5836 3300 (Phone)
(39 02) 5836 3302 (Fax)

Todd E. Clark (Contact Author)

Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States
216-579-2015 (Phone)

Massimiliano Marcellino

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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