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COINTEGRATION AND CHANGES IN REGIME: THE JAPANESE CONSUMPTION FUNCTION
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1997
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East Asian StudiesJapanese Consumption FunctionEconomic FluctuationMonetary PolicyUnknown Transition ProbabilitiesEconomic AnalysisLong-run ParametersMacroeconomic ModelStatisticsEconomicsEconomic TrendFinanceDynamic Economic ModelMacroeconomicsExchange Rate MovementBusinessEconometricsUnobserved Markov ChainForeign Exchange Market
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.