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Regime-Switching Cointegration

  • Markus Jochmann

    (Newcastle University, UK; The Rimini Centre for Economic Analysis (RCEA), Italy)

  • Gary Koop

    (University of Strathclyde, UK; The Rimini Centre for Economic Analysis (RCEA), Italy)

We develop methods for Bayesian inference in vector error correction models which are subject to a variety of switches in regime (e.g. Markov switches in regime or structural breaks). An important aspect of our approach is that we allow both the cointegrating vectors and the number of cointegrating relationships to change when the regime changes. We show how Bayesian model averaging r model selection methods can be used to deal with the high-dimensional model space that results. Our methods are used in an empirical study of the Fisher effect.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 40_11.

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Date of creation: Sep 2011
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Handle: RePEc:rim:rimwps:40_11
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  1. Park, Joon Y. & Hahn, Sang B., 1999. "Cointegrating Regressions With Time Varying Coefficients," Econometric Theory, Cambridge University Press, vol. 15(05), pages 664-703, October.
  2. Koop, Gary & Leon-Gonzalez, Roberto & Strachan, Rodney W., 2008. "Bayesian Inference in the Time Varying Cointegration Model," SIRE Discussion Papers 2008-60, Scottish Institute for Research in Economics (SIRE).
  3. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, December.
  4. Chib, Siddhartha, 1998. "Estimation and comparison of multiple change-point models," Journal of Econometrics, Elsevier, vol. 86(2), pages 221-241, June.
  5. Gary Koop & Simon M. Potter & Rodney W. Strachan, 2005. "Re-examining the Consumption-Wealth Relationship: The Role of Model Uncertainty," Discussion Papers in Economics 05/3, Department of Economics, University of Leicester.
  6. Quintos, Carmela E., 1998. "Stability tests in error correction models," Journal of Econometrics, Elsevier, vol. 82(2), pages 289-315, February.
  7. Jochmann, Markus & Koop, Gary & Leon-Gonzalez & Strachan, Rodney W., 2009. "Stochastic Search Variable Selection in Vector Error Correction Models with an Application to a Model of the UK Macroeconomy," SIRE Discussion Papers 2009-44, Scottish Institute for Research in Economics (SIRE).
  8. Strachan, R., 2000. "Valid Bayesian Estimation of the Cointegrating Error Correction Model," Monash Econometrics and Business Statistics Working Papers 6/00, Monash University, Department of Econometrics and Business Statistics.
  9. Chib, Siddhartha, 1996. "Calculating posterior distributions and modal estimates in Markov mixture models," Journal of Econometrics, Elsevier, vol. 75(1), pages 79-97, November.
  10. Martin, G.M., 1998. "U.S. Deficit Sustainability: A New Approach Based on Multiple Endogenous Breaks," Monash Econometrics and Business Statistics Working Papers 1/98, Monash University, Department of Econometrics and Business Statistics.
  11. Gary Koop & Roberto León-González & Rodney W. Strachan, 2010. "Efficient Posterior Simulation for Cointegrated Models with Priors on the Cointegration Space," Econometric Reviews, Taylor & Francis Journals, vol. 29(2), pages 224-242, April.
  12. Andrade, Philippe & Bruneau, Catherine & Gregoir, Stephane, 2005. "Testing for the cointegration rank when some cointegrating directions are changing," Journal of Econometrics, Elsevier, vol. 124(2), pages 269-310, February.
  13. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
  14. Andrew Ang & Geert Bekaert, 1998. "Regime Switches in Interest Rates," NBER Working Papers 6508, National Bureau of Economic Research, Inc.
  15. Sugita, Katsuhiro, 2006. "Bayesian Analysis of Dynamic Multivariate Models with Multiple Structural Breaks," Discussion Papers 2006-14, Graduate School of Economics, Hitotsubashi University.
  16. Richard Paap & Herman K. van Dijk, 1999. "Bayes Estimates of Markov Trends in possibly Cointegrated Series: An Application to US Consumption and Income," Tinbergen Institute Discussion Papers 99-024/4, Tinbergen Institute.
  17. Beyer, Andreas & Haug, Alfred A. & Dewald, William G., 2009. "Structural breaks, cointegration and the Fisher effect," Working Paper Series 1013, European Central Bank.
  18. Gary Koop & Roberto Leon-Gonzalez & Rodney Strachan, 2006. "Bayesian Inference in a Cointegrating Panel Data Model," Discussion Papers in Economics 06/2, Department of Economics, University of Leicester.
  19. Strachan, Rodney W. & Inder, Brett, 2004. "Bayesian analysis of the error correction model," Journal of Econometrics, Elsevier, vol. 123(2), pages 307-325, December.
  20. Saikkonen, Pentti & Choi, In, 2004. "Cointegrating Smooth Transition Regressions," Econometric Theory, Cambridge University Press, vol. 20(02), pages 301-340, April.
  21. John F. Geweke, 1995. "Bayesian reduced rank regression in econometrics," Working Papers 540, Federal Reserve Bank of Minneapolis.
  22. repec:rim:rimwps:02-07 is not listed on IDEAS
  23. repec:rim:rimwps:23-08 is not listed on IDEAS
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