Origins and Nature of Macroeconomic Instability in Vector Autoregressions
Fuente:
arXiv
Gespeichert in:
| Hauptverfasser: | , , |
|---|---|
| Format: | Preprint |
| Veröffentlicht: |
2025
|
| Schlagworte: | |
| Online-Zugang: | |
| Tags: |
Tag hinzufügen
Keine Tags, Fügen Sie den ersten Tag hinzu!
|
| _version_ | 1866909974574137344 |
|---|---|
| author | Amir-Ahmadi, Pooyan Mlikota, Marko Stevanović, Dalibor |
| author_facet | Amir-Ahmadi, Pooyan Mlikota, Marko Stevanović, Dalibor |
| contents | For a general class of dynamic and stochastic structural models, we show that (i) non-linearity in economic dynamics is a necessary and sufficient condition for time-varying parameters (TVPs) in the reduced-form VARMA process followed by observables, and (ii) all parameters' time-variation is driven by the same, typically few sources of stochasticity: the structural shocks. Our results call into question the common interpretation that TVPs are due to "structural instabilities". Motivated by our theoretical analysis, we model a set of macroeconomic and financial variables as a TVP-VAR with a factor-structure in TVPs. This reveals that most instabilities are driven by a few factors, which comove strongly with measures of macroeconomic uncertainty and the contribution of finance to real economic activity, commonly emphasized as important sources of non-linearities in macroeconomics. Furthermore, our model yields improved forecasts relative to the standard TVP-VAR where TVPs evolve as independent random walks. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2512_20152 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Origins and Nature of Macroeconomic Instability in Vector Autoregressions Amir-Ahmadi, Pooyan Mlikota, Marko Stevanović, Dalibor Econometrics For a general class of dynamic and stochastic structural models, we show that (i) non-linearity in economic dynamics is a necessary and sufficient condition for time-varying parameters (TVPs) in the reduced-form VARMA process followed by observables, and (ii) all parameters' time-variation is driven by the same, typically few sources of stochasticity: the structural shocks. Our results call into question the common interpretation that TVPs are due to "structural instabilities". Motivated by our theoretical analysis, we model a set of macroeconomic and financial variables as a TVP-VAR with a factor-structure in TVPs. This reveals that most instabilities are driven by a few factors, which comove strongly with measures of macroeconomic uncertainty and the contribution of finance to real economic activity, commonly emphasized as important sources of non-linearities in macroeconomics. Furthermore, our model yields improved forecasts relative to the standard TVP-VAR where TVPs evolve as independent random walks. |
| title | Origins and Nature of Macroeconomic Instability in Vector Autoregressions |
| topic | Econometrics |
| url | https://arxiv.org/abs/2512.20152 |