The construction of a theory coherent prior for the TVP-VAR model imposes restrictions derived from economic theory on the model's parameters, enhancing forecasting accuracy.
Tuning the optimal degree of theory coherence requires a careful balance between model fit and complexity, impacting the model’s predictive performance over time.
Introducing a theory coherent prior in the TVP-VAR framework ensures that time-varying coefficients align with economic principles, improving the model's relevance in forecasting.
Very low values of the parameters λ and γ may lead to a high discrepancy between coefficients across consecutive time periods, affecting long-term forecasting negatively.
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