Modelling evolving long-run relationships: An application to the Italian energy market

This paper considers a SUTSE model embedded in a dynamic framework to estimate an energy cost share model for the Italian economy in an evolving environment. This is achieved by allowing stochastic seasonal and trend components in the long-run specification and constructing an error correction mechanism to model short-run dynamics. Modelling instability in the structural time series approach is shown to be a very flexible approach to non conventional cointegration analysis. Tests for instability in the cointegrating regression support the evolving specification adopted.