Model Uncertainty in Panel Vector Autoregressive Models

Gary Koop, Dimitris Korobilis

Research output: Working paperDiscussion paper

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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 parsimonious 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
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-25
Number of pages26
Volume14
Publication statusPublished - Aug 2014

Keywords

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

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