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

This paper considers a SUTSE model embedded in a dynamic framework to estim ate an energy cost share model for the Italian economy in an evolving envir onmental. This is achieved by allowing stochastic seasonal and trend compon ents in the long-run specification and constructing an error correction mec hanism to model short-run dynamics. Modelling instability in the structural time series approach is shown to be a very flexible approach to non conven tional cointegration analysis. Tests for instability in the cointegrating r egression support the evolving specification adopted.