DP10801 Structural Analysis with Multivariate Autoregressive Index Models

Author(s): Andrea Carriero, George Kapetanios, Massimiliano Marcellino
Publication Date: September 2015
Keyword(s): Bayesian VARs, factor models, forecasting, large datasets, Multivariate Autoregressive Index models, Reduced Rank Regressions, structural analysis
JEL(s): C11, C13, C33, C53
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10801

We address the issue of parameter dimensionality reduction in Vector Autoregressive models (VARs) for many variables by imposing specific reduced rank restrictions on the coefficient matrices that simplify the VARs into Multivariate Autoregressive Index (MAI) models. We derive the Wold representation implied by the MAIs and show that it is closely related to that associated with dynamic factor models. Next, we describe classical and Bayesian estimation of large MAIs, and discuss methods for the rank determination. Then, the theoretical analysis is extended to the case of general rank restrictions on the VAR coefficients. Finally, the performance of the MAIs is compared with that of large Bayesian VARs in the context of Monte Carlo simulations and two empirical applications, on on the transmission mechanism of monetary policy and the propagation of demand, supply and financial shocks.