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Bayesian inference in a time varying cointegration model

  • Koop, Gary
  • Leon-Gonzalez, Roberto
  • Strachan, Rodney W.

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 a new time varying parameter model which permits cointegration. We use 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 the Fisher effect.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304407611001588
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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 165 (2011)
Issue (Month): 2 ()
Pages: 210-220

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Handle: RePEc:eee:econom:v:165:y:2011:i:2:p:210-220
DOI: 10.1016/j.jeconom.2011.07.007
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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