Bayesian Inference in a Time Varying Cointegration Model

37 Pages Posted: 1 Aug 2011

See all articles by Gary Koop

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics

Roberto Leon-Gonzalez

National Graduate Institute for Policy Studies (GRIPS)

Rodney W. Strachan

University of Queensland - School of Economics

Date Written: August 1, 2011

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 cointegrations. This is despite the fact that cointegration plays an important role in informing macroeconomists on a range of issues. In this paper we develop a new time varying parameter model which permits cointegration. We use 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 the Fisher effect.

Keywords: Bayesian, time varying cointegration, error correction model, reduced rank regression, Markov Chain Monte Carlo

JEL Classification: C11, C32, C33

Suggested Citation

Koop, Gary and Leon-Gonzalez, Roberto and Strachan, Rodney W., Bayesian Inference in a Time Varying Cointegration Model (August 1, 2011). Available at SSRN: https://ssrn.com/abstract=1899383 or http://dx.doi.org/10.2139/ssrn.1899383

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom

Roberto Leon-Gonzalez

National Graduate Institute for Policy Studies (GRIPS) ( email )

7-22-1 Roppongi, Minato-Ku
Tokyo 106-8677, Tokyo 106-8677
Japan

Rodney W. Strachan (Contact Author)

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

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