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Regime-switching Vector Error Correction Model (VECM) analysis of UK meat consumption

Philip Kostov and John Lingard
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John Lingard: University of Newcastle

Econometrics from University Library of Munich, Germany

Abstract: The standard Vector Error Correction Model (VECM) approach to investigating the underlying dynamics of economic variables assumes a constant co-integration space. This paper relaxes this assumption by implementing a regime switching VECM that allows for shifts in both the drift and the long-run equilibrium. Applying this more flexible formulation to a study of UK meat consumption, we can clearly identify several shifts in meat consumption. These can be explained by significant shocks in consumer confidence in meat safety, such as BSE. Although it is possible to model these explicitly, since the approach adopted models the regime shift in terms of an unobserved state variable, it can be useful in identifying such shifts, thus allowing them to be modeled in subsequent steps.

Keywords: Markov switching; vector autoregression; error correction model (search for similar items in EconPapers)
JEL-codes: C32 C51 C52 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2004-09-15
New Economics Papers: this item is included in nep-ets
Note: Type of Document - pdf; pages: 31
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