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Bayesian multivariate Beveridge–Nelson decomposition of I(1) and I(2) series with cointegration

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  • Murasawa Yasutomo

    (Konan University, Faculty of Economics, 8-9-1 Okamoto, Higashinada-ku, Kobe, Hyogo 658-8501, Japan)

Abstract

The dynamic IS equation implies that if the real interest rate is I(1), then so is the output growth rate with possible cointegration, and log output is I(2). This paper extends the Beveridge–Nelson decomposition to such a case, and develops a Bayesian method to obtain error bands. The method is valid whether log output is I(1) or I(2). The paper applies the method to US data to estimate the natural rates (or their permanent components) and gaps of output, inflation, interest, and unemployment jointly, and finds that allowing for cointegration gives much bigger estimates of the gaps for all variables.

Suggested Citation

  • Murasawa Yasutomo, 2022. "Bayesian multivariate Beveridge–Nelson decomposition of I(1) and I(2) series with cointegration," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 26(3), pages 387-415, June.
    • Handle: RePEc:bpj:sndecm:v:26:y:2022:i:3:p:387-415:n:4
    DOI: 10.1515/snde-2020-0049
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    More about this item

    Keywords

    natural rate; output gap; trend-cycle decomposition; trend inflation; unit root; vector error correction model (VECM);
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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