Time varying dimension models

Publication Type:
Journal Article
Journal of Business and Economic Statistics, 2012, 30 (3), pp. 358 - 367
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Time varying parameter (TVP) models have enjoyed an increasing popularity in empirical macroeconomics. However, TVP models are parameter-rich and risk over-fitting unless the dimension of the model is small. Motivated by this worry, this article proposes several Time Varying Dimension (TVD) models where the dimension of the model can change over time, allowing for the model to automatically choose a more parsimonious TVP representation, or to switch between different parsimonious representations. Our TVD models all fall in the category of dynamic mixture models. We discuss the properties of these models and present methods for Bayesian inference. An application involving U.S. inflation forecasting illustrates and compares the different TVD models.We find our TVD approaches exhibit better forecasting performance than many standard benchmarks and shrink toward parsimonious specifications. This article has online supplementary materials. © 2012 American Statistical Association.
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