Tractable Bayesian estimation of smooth transition vector autoregressive models

Abstract

Summary We develop a tractable way of estimating the parameters ruling the nonlinearity in the popular smooth transition VAR model, and identify structural shocks using external instruments. This jointly offers an alternative to the option of identifying shocks recursively and calibrating key parameters. In an illustration, we show that monetary policy shocks generate larger effects on economic activity during economic expansions compared to economic recessions. We then document that calibrating rather than estimating the parameters ruling the nonlinearity of the model can lead to values for which the key results are lost. This suggests caution in the calibration of these parameters.