Bayesian Inference in the Time Varying Cointegration Model

Gary Koop, Roberto Leon-Gonzalez and Rodney Strachan

No 08-01, GRIPS Discussion Papers from National Graduate Institute for Policy Studies

Abstract: There are both theoretical and empirical reasons for believing that the pa- rameters 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 specification 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.

Keywords: Bayesian; time varying cointegration; error correctionmodel; reduced rank regression; Markov Chain Monte Carlo. (search for similar items in EconPapers)
JEL-codes: C11 C32 C33 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2008-05
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Bayesian inference in a time varying cointegration model (2011)
Working Paper: Bayesian Inference in a Time Varying Cointegration Model (2011)
Working Paper: Bayesian Inference in the Time Varying Cointegration Model* (2011)
Working Paper: Bayesian Inference in the Time Varying Cointegration Model (2008)
Working Paper: Bayesian Inference in the Time Varying Cointegration Model (2008)
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