Picture of wind turbine against blue sky

Open Access research with a real impact...

The Strathprints institutional repository is a digital archive of University of Strathclyde research outputs.

The Energy Systems Research Unit (ESRU) within Strathclyde's Department of Mechanical and Aerospace Engineering is producing Open Access research that can help society deploy and optimise renewable energy systems, such as wind turbine technology.

Explore wind turbine research in Strathprints

Explore all of Strathclyde's Open Access research content

Time varying dimension models

Koop, Gary and Strachan, Rodney and Leon-Gonzalez, Roberto and Chan, Joshua (2012) Time varying dimension models. Journal of Business and Economic Statistics. ISSN 0735-0015 (In Press)

[img] PDF
11_16_Final.pdf

Download (254kB)

Abstract

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 paper 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 US inflation forecasting illustrates and compares the different TVD models. We find our TVD approaches exhibit better forecasting performance than several standard benchmarks and shrink towards parsimonious specifications.