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Vector rational error correction

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  • Kozicki, Sharon
  • Tinsley, P. A.

Abstract

Systems of forward-looking linear decision rules can be formulated as vector "rational" error correction models. The closed-form solution of the restricted error corrections is derived, and a full-information estimator is suggested. The error correction format indicates that the assumptions of convex adjustment costs and rational expectations impose different types of a priori restrictions on the dynamic structure of the error corrections. An empirical model of the producer decision rule for capital investment illustrates that the data rejects dynamic restrictions imposed by a standard model of adjustment costs but supports a more general description of convex frictions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 23 (1999)
Issue (Month): 9-10 (September)
Pages: 1299-1327

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Handle: RePEc:eee:dyncon:v:23:y:1999:i:9-10:p:1299-1327

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Web page: http://www.elsevier.com/locate/jedc

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