A Guide to State Space Modeling of Multiple Time Series

In teaching time series analysis over the past several years I have become aware of the gap between the often elegant theory of the methods developed and the sometimes crude issues that arise in their application to real problems. A substantial amount of important practical information is relegated to a minor position and is either haphazardly conveyed in long sessions in the computer laboratory, or not at all. This guide is an attempt to organize and formalize that information as it applies to the use of Aoki’s state space time series procedure, employing monthly data on four macroeconomic series as an illustration. Here I am taking the role of the expert witness, and offering opinions where relevant; the judgmental decisions embodied in the discussion reflect my experience, both from my own personal projects and from those of my students.