Template-Type: ReDIF-Paper 1.0
Author-Name: Gary Koop
Author-Name-First: Gary
Author-Name-Last: Koop
Author-Email: gary.koop@strath.ac.uk
Author-Workplace-Name: Department of Economics, University of Strathclyde
Author-Name: Roberto  Leon-Gonzalez
Author-Name-First: Roberto 
Author-Name-Last: Leon-Gonzalez
Author-Email: rlg@grips.ac.jp.
Author-Workplace-Name: National Graduate Institute for Policy Studies
Author-Name: Rodney  Strachan
Author-Name-First: Rodney 
Author-Name-Last: Strachan
Author-Email: rodney.strachan@anu.edu.au
Author-Workplace-Name: The Australian National University
Title: Bayesian Inference in the Time Varying Cointegration Model*
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 cointegration. 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.
Length: 49 pages
Creation-Date: 2011-04
Revision-Date: 
Publication-Status: 
File-URL: http://www.strath.ac.uk/media/1newwebsite/departmentsubject/economics/research/researchdiscussionpapers/2011/11-21_Final.pdf
File-Format: Application/pdf
Number: 1121
Classification-JEL: C11, C32, C33
Keywords: Bayesian, time varying cointegration, error correctionmodel,reduced rank regression, Markov Chain Monte Carlo.
Handle: RePEc:str:wpaper:1121