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. Preprint / Working Paper. University of Strathclyde, Glasgow. (Unpublished)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-VARswhen allowing for cointegration. Instead we develop a specication 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.
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Item type: Monograph(Preprint / Working Paper) ID code: 7734 Dates: DateEventMay 2008PublishedSubjects: Social Sciences > Economic Theory Department: Strathclyde Business School > Economics Depositing user: Strathprints Administrator Date deposited: 18 Mar 2009 16:50 Last modified: 25 Apr 2024 01:39 URI: https://strathprints.strath.ac.uk/id/eprint/7734