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Bayesian Inference in Cointegrated I (2) Systems: a Generalisation of the Triangular Model

By Rodney W. Strachan

Abstract

This paper generalises the cointegrating model of Phillips (1991) to allow for I (0) , I (1) and I (2) processes. The model has a simple form that permits a wider range of I (2) processes than are usually considered, including a more flexible form of polynomial cointegration. Further, the specification relaxes restrictions identified by Phillips (1991) on the I (1) and I (2) cointegrating vectors and restrictions on how the stochastic trends enter the system. To date there has been little work on Bayesian I (2) analysis and so this paper attempts to address this gap in the literature. A method of Bayesian inference in potentially I (2) processes is presented with application to Australian money demand using a Jeffreys prior and a shrinkage prior

Publisher: Dept. of Economics, University of Leicester
Year: 2005
OAI identifier: oai:lra.le.ac.uk:2381/4447

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