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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 (Unpublished)

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    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.

    Item type: Monograph (Working paper)
    ID code: 7734
    Keywords: bayesian, time varying cointegration, error correction model, reduced rank regression, markov chain, monte carlo method, Economic Theory
    Subjects: Social Sciences > Economic Theory
    Department: Strathclyde Business School > Economics
    Related URLs:
      Depositing user: Strathprints Administrator
      Date Deposited: 18 Mar 2009 16:50
      Last modified: 06 Sep 2014 13:52
      URI: http://strathprints.strath.ac.uk/id/eprint/7734

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