System Priors for Econometric Time Series

Abstract

The Working Paper Series of the Czech National Bank (CNB) is intended to disseminate the results of the CNB's research projects as well as the other research activities of both the staff of the CNB and collaborating outside contributors, including invited speakers. The Series aims to present original research contributions relevant to central banks. It is refereed internationally. The referee process is managed by the CNB Research Department. The working papers are circulated to stimulate discussion. The views expressed are those of the authors and do not necessarily reflect the official views of the CNB.

Monetary and Fiscal Policy Interactions in the Czech Republic

“…It then seems natural to use this information on the cyclical nature of the series in order to obtain reasonable parameter estimates and this is exactly what we do. Setting prior values on parameters of an AR(2) process equal to 1.1 and −0.4 corresponds to a belief that the process is dominated by business-cycle oscillations (see for details [28]). Prior variances are chosen so as to roughly cover a range of values leading to similar frequency characteristics of the process.…”