Bayes Estimates of Markov Trends in possibly Cointegrated Series: An Application to US Consumption and Income

Richard Paap and Herman van Dijk

No 99-024/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper resulted in an article in the Journal of Business & Economic Statistics (2003). Volume 21, pages 547-563.

Stylized facts show that the average growth rates of US per capitaconsumption and income differ in recession and expansion periods.Since a linear combination of such series does not have to be a constant meanprocess, standard cointegration analysis between the variables, toexamine the permanent income hypothesis, may not be valid. To model thechanging growth rates in both series, we introduce a multivariate Markov trendmodel, which allows for different growth rates in consumption and incomeduring expansions and recessions. The deviations from the multivariateMarkov trend are modelled by a vector autoregressive model. Bayes estimates ofthis model are obtained using Markov chain Monte Carlo methods. The empiricalresults suggest that there exist a cointegration relation between US percapita disposable income and consumption, after correction for amultivariate Markov trend.

Keywords: multivariate Markov trend; cointegration; MCMC; permanent income hypothesis (search for similar items in EconPapers)
Date: 1999-03-31
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Bayes Estimates of Markov Trends in Possibly Cointegrated Series: An Application to U.S. Consumption and Income (2003)
Working Paper: Bayes estimates of Markov trends in possibly cointegrated series: an application to US consumption and income (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:19990024

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