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Bayesian inference in cointegrated VAR models - with applications to the demand for euro area M3

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Anders Warne () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)

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Abstract

The paper considers a Bayesian approach to the cointegrated VAR model with a uniform prior on the cointegration space. Building on earlier work by Villani (2005b), where the posterior probability of the cointegration rank can be calculated conditional on the lag order, the current paper also makes it possible to compute the joint posterior probability of these two parameters as well as the marginal posterior probabilities under the assumption of a known upper bound for the lag order. When the marginal likelihood identity is used for calculating these probabilities, a point estimator of the cointegration space and the weights is required. Analytical expressions are therefore derived of the mode of the joint posterior of these parameter matrices. The procedure is applied to a money demand system for the euro area and the results are compared to those obtained from a maximum likelihood analysis. JEL Classification: C11, C15, C32, E41.

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Paper provided by European Central Bank in its series Working Paper Series with number 692.

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Length: 41 pages
Date of creation: Nov 2006
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Handle: RePEc:ecb:ecbwps:20060692

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Related research
Keywords: Bayesian inference; cointegration; lag order; money demand; vector autoregression.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  21. Phillips, Peter C B, 1994. "Some Exact Distribution Theory for Maximum Likelihood Estimators of Cointegrating Coefficients in Error Correction Models," Econometrica, Econometric Society, vol. 62(1), pages 73-93, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andrea, SILVESTRINI, 2007. "Testing fiscal sustainability in Poland : a Bayesian analysis of cointegration," Discussion Papers (ECON - Département des Sciences Economiques) 2007040, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
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