This paper focuses on the dynamic properties of error correction models (ECM). It is shown that the absence of structural breaks in the cointegrating vector does not necessarily imply that also all parameters of the dynamic specification of the ECM are time invariant. In some cases, depending on the data generating process of regressors, the intercept has to be time varying in order to have the long run equilibrium of a dynamic model independent of the growth rates of the variables out of sample period, i.e. to satisfy the dynamic homogeneity condition. It is found to be common when estimating ECMs on macroeconomic time series of converging countries. Dynamic homogeneity can be achieved by imposing the state dependent dynamic homogeneity restriction on the intercept. Applying the restriction is illustrated by an empirical example using Estonian data on real wages and labour productivity
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Did you know? Each page is provided with a technical contact, in case something is not right with the supplied information. See under "publisher info".