Discussion paper
DP18992 Flexible prior beliefs on impulse responses in Bayesian vector autoregressive models
We develop a prior for VAR coefficients that allows for flexible non-dogmatic beliefs on the shape of the structural impulse responses. We achieve this using an alternative setting of the moments of a Normal prior for the autoregressive parameters. Posterior computations are no more demanding than existing prior specifications; yet the methodology offers a tool for Bayesian shrinkage over key outputs of the model. Introducing the prior belief that monetary policy shocks generate temporary but persistent effects leads to a hump-shaped response of GDP, with the peak occurring between twelve and eighteen months after the shock.
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