DP4033 Panel Index VAR Models: Specification, Estimation, Testing and Leading Indicators

Author(s): Fabio Canova , Matteo Ciccarelli

Publication Date: August 2003

Keyword(s): panel var , bayesian methods , leading indicators , markov chain monte carlo methods

JEL(s): C30 , E50

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4033.asp

This Paper proposes a method to conduct inference in panel VAR models with cross-unit interdependencies and time variations in the coefficients. The set-up used is Bayesian, and Markov chain Monte Carlo (MCMC) methods are used to estimate the posterior distribution of the features of interest. The model is re-parameterized to resemble an observable index model and specification searches are discussed. The approach can be used to construct multi-unit forecasts, leading indicators and to conduct policy analysis in multi-unit set-ups. The methodology is employed to construct leading indicators for inflation and GDP growth in the euro area.