This paper exploits the restrictions implied by economic theory to formulate a prior for the parameters of TVP-VARs so as to enhance inference within this class of models.
The introduction of a shrinkage prior that centers the time varying coefficients at each time period on cross equation restrictions improves forecast accuracy and inference.
Utilizing economic shrinkage can lead to both improved forecasting and more precise estimation of impulse responses, addressing common overfitting issues in TVP-VAR models.
Future research may involve modifying the proposed prior to incorporate competing theories and extending the model to include stochastic volatility for better performance.
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