GRIPS 政策研究センター Policy Research Center


May 22, 2008 Report No:08-01

Bayesian Inference in the Time Varying Cointegration Model

  • Gary KoopRimini Center for Economic Analysis
  • Roberto Leon GonzalezGRIPS
  • Rodney StrachanRimini Center for Economic Analysis
Field Economics
Language English

There are both theoretical and empirical reasons for believing that the pa-
rameters 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 coin-
tegration. 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 speci…cation which
allows for the cointegrating space to evolve over time in a manner compa-
rable 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.

Keywords Bayesian, time varying cointegration, error correctionmodel, reduced rank regression, Markov Chain Monte Carlo. JEL Classi…cation: C11, C32, C33
attachment 08-01.pdf