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Non-linear error correction, asymmetric adjustment and cointegration

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  • Escribano, Alvaro
  • Pfann, Gerard A.

Abstract

This article links the intertemporal choice model with the non-linear error correction (NEC) model. It has three main components. First, it outlines a model of non-linear error correction, in which the linear error correction term ?Xt (the vector time series Xt is cointegrated, is the cointegrating vector) is replaced by the non-linear term g(?Xt), where g(.) is a non-linear function. Second, several types of asymmetries and the existence of multiple equilibria are discussed. The implications for the NEC model of trending targets are also explained. Third, it is shown that non-linear error correction is present in a trivariate series of UK employment, wage and capital stock.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 15 (1998)
Issue (Month): 2 (April)
Pages: 197-216

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Handle: RePEc:eee:ecmode:v:15:y:1998:i:2:p:197-216

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Web page: http://www.elsevier.com/locate/inca/30411

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  1. Hylleberg, Svend & Mizon, Grayham E, 1989. "Cointegration and Error Correction Mechanisms," Economic Journal, Royal Economic Society, vol. 99(395), pages 113-25, Supplemen.
  2. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107, September.
  3. Pfann, Gerard A. & Verspagen, Bart, 1989. "The structure of adjustment costs for labour in the Dutch manufacturing sector," Open Access publications from Maastricht University urn:nbn:nl:ui:27-18006, Maastricht University.
  4. Peter C.B. Phillips, 1988. "Optimal Inference in Cointegrated Systems," Cowles Foundation Discussion Papers 866R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1989.
  5. Bewley, R. A., 1979. "The direct estimation of the equilibrium response in a linear dynamic model," Economics Letters, Elsevier, vol. 3(4), pages 357-361.
  6. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
  7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  8. Alvaro Escribano & Santiago Mira, 2001. "Nonlinear error correction models," Documentos de trabajo conjunto ULL-ULPGC 2001-03, Facultad de Ciencias Económicas de la ULPGC.
  9. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
  10. Novales, Alfonso, 1990. "Solving Nonlinear Rational Expectations Models: A Stochastic Equilibrium Model of Interest Rates," Econometrica, Econometric Society, vol. 58(1), pages 93-111, January.
  11. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  12. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-56, September.
  13. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
  14. Escribano, Álvaro, 2004. "Nonlinear Error Correction: The Case of Money Demand in the UK (1878-2000)," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/2573, Universidad Carlos III de Madrid.
  15. Escribano, A., 1987. "Error-correction systems: nonlinear adjustments to linear long-run relationships," CORE Discussion Papers 1987030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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