Abstract:
In this paper, we develop econometric methods for estimating large Bayesian time-varying parameter panel vector autoregressions (TVP-PVARs) and use these methods to forecast inflation for euro area countries. Large TVP-PVARs contain huge numbers of parameters which can lead to over-parameterization and computational concerns. To overcome these concerns, we use hierarchical priors which reduce the dimension of the parameter vector and allow for dynamic model averaging or selection over TVP-PVARs of different dimensions and different priors. We use forgetting factor methods which greatly reduce the computational burden. Our empirical application shows substantial forecast improvements over plausible alternatives.