Using Simulation Methods for Bayesian Econometric Models: Inference, Development, and Communication

This paper surveys the fundamental principles of subjective Bayesian inference in econometrics and the implementation of those principles using posterior simulation methods. The emphasis is on the combination of models and the development of predictive distributions. Moving beyond conditioning on a fixed number of completely specified models, the paper introduces subjective Bayesian tools for formal comparison of these models with as yet incompletely specified models. The paper then shows how posterior simulators can facilitate communication between investigators (for example, econometricians) on the one hand and remote clients (for example, decision makers) on the other, enabling clients to vary the prior distributions and functions of interest employed by investigators. A theme of the paper is the practicality of subjective Bayesian methods. To this end, the paper describes publicly available software for Bayesian inference, model development, and communication and provides illustrations using two simple econometric models. *This paper was originally prepared for the Australasian meetings of the Econometric Society in Melbourne, Australia, from July 2–4, 1997. Financial support from National Science Foundation grant SBR-9600040 is gratefully acknowledged, as is fine research assistance from Hulya Eraslan and John Landon-Lane. Siddhartha Chib, William Griffiths, Michael Keane, Dale Poirier, and four anonymous referees provided helpful comments on earlier versions. My understanding of the issues in this paper has greatly benefited from discussions over the years with these and many other individuals, but misconceptions conveyed in this work are entirely my own. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.  1997 by John Geweke. This document may be freely reproduced for educational and research purposes provided that (i) this copyright notice is included with each copy, (ii) no changes are made in the document, and (iii) copies are not sold, but retained for individual use or distributed free of charge.