Newcastle University Rimini Centre for Economic Analysis

We develop methods for Bayesian inference in vector error correction models which are subject to a variety of switches in regime (e.g. Markov switches in regime or structural breaks). An important aspect of our approach is that we allow both the cointegrating vectors and the number of cointegrating relation-ships to change when the regime changes. We show how Bayesian model aver-aging or model selection methods can be used to deal with the high-dimensional model space that results. Our methods are used in an empirical study of the Fisher effect