Fast and Flexible Bayesian Inference in Time-varying Parameter Regression Models. Issue 4 (2nd October 2022)

• Record Type: Journal Article
• Authors: Hauzenberger, Niko; Huber, Florian; Koop, Gary; Onorante, Luca
• Is Part Of: Journal of business & economic statistics. Volume 40:Issue 4(2022)
• Page Start: 1904
• Page End: 1918
• Publication Date: 2022-10-02
• Subjects: Clustering -- Hierarchical priors -- Singular value decomposition -- Time-varying parameter regression; Economics -- Statistical methods -- Periodicals; Commercial statistics -- Periodicals; Économie politique -- Méthodes statistiques -- Périodiques; Statistique commerciale -- Périodiques; 330.015195
• DOI: 10.1080/07350015.2021.1990772
• Languages: English
• ISSNs: 0735-0015

Abstract

Abstract: In this article, we write the time-varying parameter (TVP) regression model involving K explanatory variables and T observations as a constant coefficient regression model with KT explanatory variables. In contrast with much of the existing literature which assumes coefficients to evolve according to a random walk, a hierarchical mixture model on the TVPs is introduced. The resulting model closely mimics a random coefficients specification which groups the TVPs into several regimes. These flexible mixtures allow for TVPs that feature a small, moderate or large number of structural breaks. We develop computationally efficient Bayesian econometric methods based on the singular value decomposition of the KT regressors. In artificial data, we find our methods to be accurate and much faster than standard approaches in terms of computation time. In an empirical exercise involving inflation forecasting using a large number of predictors, we find our models to forecast better than alternative approaches and document different patterns of parameter change than are found with approaches which assume random walk evolution of parameters.