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Cointegration and Changes in Regime: The Japanese Consumption Function

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  • Hall, Stephen G
  • Psaradakis, Zacharias
  • Sola, Martin

Abstract

In this paper we examine a model of cointegration where long-run parameters are subject to switching between several different cointegrating regimes. These shifts are allowed to be governed by the outcome of an unobserved Markov chain with unknown transition probabilities. We illustrate this approach using Japanese data on consumption and disposable income, and find that the data favor a Markov-switching long-run relationship over a standard temporally stable formulation.

Suggested Citation

  • Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1997. "Cointegration and Changes in Regime: The Japanese Consumption Function," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 151-168, March-Apr.
    • Handle: RePEc:jae:japmet:v:12:y:1997:i:2:p:151-68
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