Bayesian inference in a time varying cointegration model |
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Authors: | Gary Koop Roberto Leon-Gonzalez Rodney W Strachan |
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Institution: | aUniversity of Strathclyde, United Kingdom;bNational Graduate Institute for Policy Studies, Japan;cThe Australian National University, Australia |
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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 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. |
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Keywords: | JEL classification: C11 C32 C33 |
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