Large time-varying parameter VARs: A nonparametric approach

TY - JOUR

T1 - Large time-varying parameter VARs

T2 - A nonparametric approach

AU - Kapetanios, George

AU - Marcellino, Massimiliano

AU - Venditti, Fabrizio

PY - 2019/11/1

Y1 - 2019/11/1

N2 - In this paper we introduce a nonparametric estimation method for a large Vector Autoregression (VAR) with time-varying parameters. The estimators and their asymptotic distributions are available in closed form. This makes the method computationally efficient and capable of handling information sets as large as those typically handled by factor models and Factor Augmented VARs. When applied to the problem of forecasting key macroeconomic variables, the method outperforms constant parameter benchmarks and compares well with large (parametric) Bayesian VARs with time-varying parameters. The tool can also be used for structural analysis. As an example, we study the time-varying effects of oil price shocks on sectoral U.S. industrial output. According to our results, the increased role of global demand in shaping oil price fluctuations largely explains the diminished recessionary effects of global energy price increases.

AB - In this paper we introduce a nonparametric estimation method for a large Vector Autoregression (VAR) with time-varying parameters. The estimators and their asymptotic distributions are available in closed form. This makes the method computationally efficient and capable of handling information sets as large as those typically handled by factor models and Factor Augmented VARs. When applied to the problem of forecasting key macroeconomic variables, the method outperforms constant parameter benchmarks and compares well with large (parametric) Bayesian VARs with time-varying parameters. The tool can also be used for structural analysis. As an example, we study the time-varying effects of oil price shocks on sectoral U.S. industrial output. According to our results, the increased role of global demand in shaping oil price fluctuations largely explains the diminished recessionary effects of global energy price increases.

UR - http://www.scopus.com/inward/record.url?scp=85074328045&partnerID=8YFLogxK

U2 - 10.1002/jae.2722

DO - 10.1002/jae.2722

M3 - Article

AN - SCOPUS:85074328045

SN - 0883-7252

VL - 34

SP - 1027

EP - 1049

JO - JOURNAL OF APPLIED ECONOMETRICS

JF - JOURNAL OF APPLIED ECONOMETRICS

IS - 7

ER -