The importance of common cyclical features in VAR analysis: a Monte-Carlo study

Abstract

Despite the commonly held belief that aggregate data display short-run comovement, there has been little discussion about the econometric consequences of this feature of the data. We use exhaustive Monte-Carlo simulations to investigate the importance of restrictions implied * Acknowledgments: This paper was written while João Victor Issler was visiting Monash University, and it was revised while Farshid Vahid was visiting Getulio Vargas Foundation. The hospitality of both institutions are gratefully acknowledged. We have beneÞted from comments and suggestions of Heather Anderson, Carlos Martins-Filho, Aman Ullah, Arnold Zellner (Editor), the Associate Editor, four anonymous referees, and participants of the Latin American and the European Meetings of the Econometric Society. We thank George Athanasopoulos for excellent research assistance. The authors are responsible for any remaining errors in this paper. João Victor Issler acknowledges the support of CNPq-Brazil and PRONEX. Farshid Vahid is grateful for Þnancial support provided by the Monash University Research Fund Grant No. 22.097.007, and CNPq-Brazil. † Corresponding author. by common-cyclical features for estimates and forecasts based on vector autoregressive models. First, we show that the "best" empirical model developed without common cycle restrictions need not nest the "best" model developed with those restrictions. This is due to possible differences in the lag-lengths chosen by model selection criteria for the two alternative models. Second, we show that the costs of ignoring common cyclical features in vector autoregressive modelling can be high, both in terms of forecast accuracy and efficient estimation of variance decomposition coefficients. Third, we Þnd that the Hannan-Quinn criterion performs best among model selection criteria in simultaneously selecting the lag-length and rank of vector autoregressions.

VARs, common factors and the empirical validation of equilibrium business cycle models

“…Third, imposing the additional restriction r = 2, which exploit "common features", alows to obtain a more parsimonious representation and therefore improves the precision of the estimation (for a similar result, based on common cycle restrictions, see Vahid and Issler, 2002). …”

Codependent VAR models and the pseudo-structural form

“…Moreover, the imposition of common cyclical features on a VAR can lead to higher accuracy of forecasts and of estimates of impulse-response functions as demonstrated by Vahid & Issler (2002). Therefore, it is of interest to analyze whether codependence can be uniquely imposed on a VAR.…”

A characterization of vector autoregressive processes with common cyclical features

“…Kugler and Neusser (1993), Lippi and Reichlin (1994), Vahid and Issler (2002), Urbain (2002, 2006), Paruolo (2003Paruolo ( , 2006, Schleicher (2007) and Cubadda, Hecq, and Palm (2009).…”