A Bayesian model averaging procedure is presented that makes use of a finite mixture of many model structures within the class of vector autoregressive (VAR) processes. It is applied to two empirical issues. First, stability of the Great Ratios in U.S. macro-economic time series is investigated, together with the effect of permanent shocks on business cycles. Second, the linear VAR model is extended to include a smooth transition function in a (monetary) equation and stochastic volatility in the disturbances. The risk of a liquidity trap in the U.S.A. and Japan is evaluated. Although this risk found to be reasonably high, we find only mild evidence that the monetary policy transmission mechanism is different and that central banks consider the expected cost of a liquidity trap in policy setting. Posterior probabilities of different models are evaluated using Markov chain Monte Carlo techniques.

Additional Metadata
Keywords Grassman manifold, cointegration, great ratios, impulse response, liquidity trap, model averaging, orthogonal group;, posterior probability, stochastic trend, vector autoregregressive model
JEL Bayesian Analysis (jel C11), Time-Series Models; Dynamic Quantile Regressions (jel C32), Model Evaluation and Testing (jel C52)
Publisher Tinbergen Institute
Persistent URL hdl.handle.net/1765/14049
Series Tinbergen Institute Discussion Paper Series
Journal Discussion paper / Tinbergen Institute
Strachan, R.W, & van Dijk, H.K. (2008). Bayesian Averaging over Many Dynamic Model Structures with Evidence on the Great Ratios and Liquidity Trap Risk (No. TI 2008-096/4). Discussion paper / Tinbergen Institute. Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/14049