Picture of a sphere with binary code

Making Strathclyde research discoverable to the world...

The Strathprints institutional repository is a digital archive of University of Strathclyde research outputs. It exposes Strathclyde's world leading Open Access research to many of the world's leading resource discovery tools, and from there onto the screens of researchers around the world.

Explore Strathclyde Open Access research content

Bayesian inference in the time varying cointegration model

Koop, G.M. and Leon-Gonzalez, Roberto and Strachan, Rodney W. (2008) Bayesian inference in the time varying cointegration model. Working paper. University of Strathclyde. (Unpublished)

[img]
Preview
PDF (strathprints007734.pdf)
strathprints007734.pdf

Download (359kB) | Preview

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 coin- tegration. 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 speci�cation 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.