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

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  • Warne, Anders

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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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0692.

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Date of creation: Nov 2006
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Handle: RePEc:ecb:ecbwps:20060692

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Keywords: Bayesian inference; cointegration; lag order; Money demand; vector autoregression;

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References

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Cited by:
  1. Andrea Silvestrini, 2010. "Testing fiscal sustainability in Poland: a Bayesian analysis of cointegration," Empirical Economics, Springer, vol. 39(1), pages 241-274, August.
  2. Ansgar Belke & Robert Czudaj, 2010. "Is Euro Area Money Demand (Still) Stable? Cointegrated VAR Versus Single Equation Techniques," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 56(4), pages 285-315.
  3. Sousa, Ricardo M., 2010. "Housing wealth, financial wealth, money demand and policy rule: Evidence from the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 21(1), pages 88-105, March.
  4. Seitz, Franz & von Landesberger, Julian, 2010. "Household money holdings in the euro area: An explorative investigation," Working Paper Series 1238, European Central Bank.

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