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Bayesian Inference in the Time Varying Cointegration Model

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Author Info

  • Gary Koop

    () (Department of Economics, University of Strathclyde)

  • Roberto Leon-Gonzalez

    () (National Graduate Institute for Policy Studies)

  • Rodney Strachan

    () (The Australian National University)

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 specification 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 inflation.

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Bibliographic Info

Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1121.

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Length: 49 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:str:wpaper:1121

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

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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.
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Cited by:
  1. Jochmann, Markus & Koop, Gary, 2011. "Regime-Switching Cointegration," SIRE Discussion Papers 2011-60, Scottish Institute for Research in Economics (SIRE).

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