RUHR - ECONOMIC PAPERS - Improving Inference and Forecasting in VAR Models Using Cross-Sectional Information

Furthermore, we showcase how the hierarchical estimation of the hyperparameters may be used for the analysis of the similarities and dissimilarities of the lagged structure of production, prices, and interest rates across the euro area and the G-7 economies. [...] While the Minnesota prior shrinks the VAR coefficients towards zero, the pooling prior pushes the coefficients of one country VAR towards the coefficients of the other country VARs. [...] A concise way to present all the parameters in the panel VAR is to stack the VAR coefficients for country i in a vector βi, such that the first GP × 1 block corresponds to the parameters of the first equation, the next block the coefficients of the second equation and so on. [...] One of the main interests of the simulation study is to examine the estimated shrinkage parameters in relation to the true coefficients. [...] The fourth column denotes the estimated shrinkage of the parameters in columns A and B (say 0.5 and 0.8 for the first row), the second column 14 rt equation πt equation yt equation A and C (say 0.5 and 0.2 for the first row) and similarly the last column captures the estimated shrinkage of B and C (say 0.8 and 0.2 for the first row).