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Lag selection in subset VAR models with an application to a US monetary system

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  • Brüggemann, Ralf
  • Lütkepohl, Helmut

Abstract

Alternative modeling strategies for specifying subset VAR models are considered. It is shown that under certain conditions a testing procedure based on t-ratios is equivalent to sequentially eliminating lags that lead to the largest improvement in a prespecified model selection criterion. A Monte Carlo study is used to illustrate the properties of different procedures. It is found that the differences between alternative strategies are small. In small samples, the strategies often fail to discover the true model. Nevertheless, using subset strategies results in models with improved forecast precision. To illustrate how these subset strategies can improve results from impulse response analysis, a VAR model is used to analyze the effects of monetary policy shocks for the U.S. economy. While the response patterns from full and subset VARs are qualitatively identical, confidence bands from the unrestricted model are considerably wider. We conclude that subset strategies can be useful modeling tools when forecasting or impulse response analysis is the main objective.

Suggested Citation

  • Brüggemann, Ralf & Lütkepohl, Helmut, 2000. "Lag selection in subset VAR models with an application to a US monetary system," SFB 373 Discussion Papers 2000,37, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    • Handle: RePEc:zbw:sfb373:200037
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    References listed on IDEAS

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    1. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
    2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    3. Benkwitz, Alexander & Lütkepohl, Helmut & Wolters, Jürgen, 2001. "Comparison Of Bootstrap Confidence Intervals For Impulse Responses Of German Monetary Systems," Macroeconomic Dynamics, Cambridge University Press, vol. 5(1), pages 81-100, February.
    4. Alexander Benkwitz & Michael Neumann & Helmut Lutekpohl, 2000. "Problems related to confidence intervals for impulse responses of autoregressive processes," Econometric Reviews, Taylor & Francis Journals, vol. 19(1), pages 69-103.
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    7. Philip Rothman & Dick van Dijk & Philip Hans Franses, 1999. "A Multivariate STAR Analysis of the Relationship Between Money and Output," Working Papers 9913, East Carolina University, Department of Economics.
    8. Brüggemann, Ralf, 2002. "On the small sample properties of weak exogeneity tests in cointegrated VAR models," SFB 373 Discussion Papers 2002,2, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    9. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521547871, November.
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    18. Avner Offer, 2000. "Economic Welfare Measurements and Human Well-Being, [revised version, March 2000]," Economics Series Working Papers 2000-W34, University of Oxford, Department of Economics.
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    More about this item

    Keywords

    Lag selection; model selection; monetary policy shocks; subset models; vector autoregressions;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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