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Regime-switching Vector Error Correction Model (VECM) analysis of UK meat consumption

Author Info

  • Philip Kostov

    (Queen's University Belfast)

  • John Lingard

    (University of Newcastle)

Abstract

The standard Vector Error Correction Model (VECM) approach to investigating the underlying dynamics of economic variables assumes a constant co-integration space. This paper relaxes this assumption by implementing a regime switching VECM that allows for shifts in both the drift and the long-run equilibrium. Applying this more flexible formulation to a study of UK meat consumption, we can clearly identify several shifts in meat consumption. These can be explained by significant shocks in consumer confidence in meat safety, such as BSE. Although it is possible to model these explicitly, since the approach adopted models the regime shift in terms of an unobserved state variable, it can be useful in identifying such shifts, thus allowing them to be modeled in subsequent steps.

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File URL: http://econwpa.repec.org/eps/em/papers/0409/0409007.pdf
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Paper provided by EconWPA in its series Econometrics with number 0409007.

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Length: 31 pages
Date of creation: 15 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpem:0409007
Note: Type of Document - pdf; pages: 31
Contact details of provider: Web page: http://econwpa.repec.org

Keywords: Markov switching; vector autoregression; error correction model;

Find related papers by JEL classification:

  • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
  • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
  • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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