COINTEGRATION AND TREND-STATIONARITY IN MACROECONOMIC TIME-SERIES - EVIDENCE FROM THE LIKELIHOOD FUNCTION

A Bayesian approach to analyzing the co-integration inference is developed and applied to data deemed to be co-integrated by Engle and Granger (1987) and Campbell and Shiller (1987); the approach explicitly considers trend-stationary alternatives. It is shown that when trend-stationarity is given zero prior probability the data often appear to be co-integrated. When this prior is relaxed the data support trend-stationary representations.