Model uncertainty in panel vector autoregressive models

Gary Koop, Dimitris Korobilis

Research output: Contribution to journalArticle

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Abstract

We develop methods for Bayesian model averaging (BMA) or selection (BMS) in Panel Vector Autoregressions (PVARs). Our approach allows us to select between or average over all possible combinations of restricted PVARs where the restrictions involve interdependencies between and heterogeneities across cross-sectional units. The resulting BMA framework can find a parsi- monious PVAR specification, thus dealing with overparameterization concerns. We use these methods in an application involving the euro area sovereign debt crisis and show that our methods perform better than alternatives. Our findings contradict a simple view of the sovereign debt crisis which divides the euro zone into groups of core and peripheral countries and worries about financial contagion within the latter group.
Original languageEnglish
Pages (from-to)115-131
Number of pages17
JournalEuropean Economic Review
Volume81
Early online date9 Oct 2015
DOIs
Publication statusPublished - 1 Jan 2016

Keywords

  • Bayesian model averaging
  • stochastic search variable selection
  • financial contagion
  • sovereign debt crisis

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