Prior Specification

In the BVAR model, the informative prior probability distribution of the VAR coefficients (β*t<sup>s</sup>* in Equation (5)) can be assigned before observing the sample data. The Minnesota prior was introduced and developed by Robert Litterman and other researchers at the University of Minnesota (Litterman 1980), and was chosen in our BVAR model. This prior is based on the behavior of most macroeconomic variables, which is approximately a multivariate random walk model with drift. The parameters of the Minnesota prior are set as follows:

