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Interpreting an Error Correction Model: Partial Adjustment, Forward-Looking Behaviour, and Dynamic International Money Demand

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  • Domowitz, Ian
  • Hakkio, Craig S

Abstract

An error correction model is derived from a stochastic dynamic programming problem incorporating rational expectations. A parametric restriction is derived that allows a test for the theoretical proposition that the optimal strategy behind the error correction form entails the failure to asymptotically close the gap between the choice variable and the growing target. This is accomplished by nesting a partial adjustment model with forward-looking expectations within the error correction paradigm. The counterintuitive behavior embodied in the error correction model is not supported by the data in the context of a cross-country comparison of cash balances relationships. Copyright 1990 by John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 5 (1990)
Issue (Month): 1 (January-March)
Pages: 29-46

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Handle: RePEc:jae:japmet:v:5:y:1990:i:1:p:29-46

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Cited by:
  1. Arize, Augustine C. & Malindretos, John & Shwiff, Steven S., 1999. "Structural breaks, cointegration, and speed of adjustment Evidence from 12 LDCs money demand," International Review of Economics & Finance, Elsevier, vol. 8(4), pages 399-420, November.
  2. Arize, A. C. & Malindretos, John & Grivoyannis, Elias C., 2005. "Inflation-rate volatility and money demand: Evidence from less developed countries," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 57-80.
  3. Subramanian S. Sriram, 1999. "Survey of Literatureon Demand for Money," IMF Working Papers 99/64, International Monetary Fund.
  4. James Boughton, 1992. "International comparisons of money demand," Open Economies Review, Springer, vol. 3(3), pages 323-343, October.
  5. Engsted, Tom & Haldrup, Niels, 1997. "Money demand, adjustment costs, and forward-looking behavior," Journal of Policy Modeling, Elsevier, vol. 19(2), pages 153-173, April.

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