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COINTEGRATION AND CHANGES IN REGIME: THE JAPANESE CONSUMPTION FUNCTION
Author(s) -
HALL STEPHEN G.,
PSARADAKIS ZACHARIAS,
SOLA MARTIN
Publication year - 1997
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/(sici)1099-1255(199703)12:2<151::aid-jae424>3.0.co;2-j
Subject(s) - cointegration , markov chain , econometrics , economics , consumption function , consumption (sociology) , statistics , mathematics , macroeconomics , social science , sociology , fiscal policy
In this paper we examine a model of cointegration where long‐run parameters are subject to switching between several different cointegrating regimes. These shifts are allowed to be governed by the outcome of an unobserved Markov chain with unknown transition probabilities. We illustrate this approach using Japanese data on consumption and disposable income, and find that the data favour a Markov‐switching long‐run relationship over a standard temporally stable formulation. © 1997 by John Wiley & Sons, Ltd.