Bayesian model averaging in vector autoregressive processes with an investigation of stability of the US great ratios and risk of a liquidity trap in the USA, UK and Japan

Abstract

A Bayesian model averaging procedure is presented within the class of\nvector autoregressive (VAR) processes and applied to two empirical issues.\nFirst, stability of the "Great Ratios" in U.S. macro-economic time series is\ninvestigated, together with the presence and e¤ects of permanent shocks.\nMeasures on manifolds are employed in order to elicit uniform priors on\nsubspaces defned by particular structural features of linear VARs. Second,\nthe VAR model is extended to include a smooth transition function in a\n(monetary) equation and stochastic volatility in the disturbances. The risk\nof a liquidity trap in the USA, UK and Japan is evaluated, together with the\nexpected cost of a policy adjustment of central banks. Posterior probabilities\nof different models are evaluated using Markov chain Monte Carlo techniques.

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