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Bayesian Inference in the Time Varying Cointegration Model

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Author Info
Gary Koop (University of Strathclyde, UK and The RImini Centre for Economic Analisys, Italy)
Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies, Japan and The RImini Centre for Economic Analisys - Italy)
Rodney W. Strachan () (University of Queensland, Australia and The RImini Centre for Economic Analisys - Italy)

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Abstract

There are both theoretical and empirical reasons for believing that the parameters of macroeconomic models may vary over time. However, work with time-varying parameter models has largely involved Vector autoregressions (VARs), ignoring cointegration. This is despite the fact that cointegration plays an important role in informing macroeconomists on a range of issues. In this paper we develop time varying parameter models which permit cointegration. Time-varying parameter VARs (TVP-VARs) typically use state space representations to model the evolution of parameters. In this paper, we show that it is not sensible to use straightforward extensions of TVP-VARs when allowing for cointegration. Instead we develop a specication which allows for the cointegrating space to evolve over time in a manner comparable to the random walk variation used with TVP-VARs. The properties of our approach are investigated before developing a method of posterior simulation. We use our methods in an empirical investigation involving a permanent/transitory variance decomposition for in‡ation.

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Paper provided by Rimini Centre for Economic Analysis in its series Working Paper Series with number 23-08.

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Date of creation: Jan 2008
Date of revision: Jan 2008
Handle: RePEc:rim:rimwps:23-08

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Related research
Keywords: Bayesian; time varying cointegration; error correctionmodel; reduced rank regression; Markov Chain Monte Carlo.;

Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data

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  1. Centoni, Marco & Cubadda, Gianluca, 2003. "Measuring the business cycle effects of permanent and transitory shocks in cointegrated time series," Economics Letters, Elsevier, vol. 80(1), pages 45-51, July. [Downloadable!] (restricted)
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