Bayesian vs. Frequentist in Practice (cont’d)

Few weeks back I simulated a model and made the point that in practice, the difference between Bayesian and Frequentist is not large. Here I apply the code to some real data; a model for Industrial Production (IP).

Explanatory variables are only Unemployment Rate (UR) and the Short Rate (SR), interaction between the two and non-linear effect in the form of squared regressors. All variables are in first differences. Will be interesting to see what is the difference in inference this time around, when we do not know the real value of the coefficients.

A natural start is the simple regression:

As expected, both UR and SR are important (though endogeneity may be at play here), interaction does not add and seems that there is also a non-linear effect of UR.

Now we run the Bayesian regression and the Bootstrap, using same functions from the previous post.

We get the following figure:

Solid black line is the standard linear model estimate. The purple is for Frequenist and orange for the Bayesian." width="700" height=700; class=size-full wp-image-1802; Solid black line is the standard linear model estimate. The purple is for Frequenist and orange for the Bayesian.
Solid black line is the standard linear model estimate. The purple is for Frequenist and orange for the Bayesian
What can we say? First it seems Confidence Intervals of the Frequentist are of the same length or a bit wider compared to the Bayesian, so more conservative (we should not generalize this). Second, in slight contrast with previous related post, it seems that there is quite the difference in the CI constructed for the Squared UR. Last, as in the simulation from last time, results are qualitatively identical as in almost all confidence levels, the two approaches reject the same variables.

As you can see, implementation of both is easy. When the Bayesian and the Frequentist agree you gain better conviction, my intuition is that they agree more often than not.

Some more (good) light reading:

 
Figures of the series can be found here.

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