Error Correction Mechanisms
The interface between economic theory and applied econometrics is often one of uneasy compromise, with the pragmatic justification for many accepted procedures resting on a theoretical base. This paper examines the surprisingly strong arguments that exist in terms of economic theory, for the use of error correction mechanisms in the specification of short run dynamic adjustment. A common heresy exists that while economic theory provides a detailed analysis of comparative static equilibria it can offer no guidance as to the appropriate specification of dynamic adjustment towards an equilibrium. perhaps in consequence it is not uncommon to find examples where the necessary dynamic specification is achieved by "tacking" onto an existing equilibrium specification some relatively ad hoc short run adjustment scheme. The intercession of stochastic arguments in this process is confused and critical implications are frequently ignored in practice, but perhaps more importantly there will typically be no guarantee that the dynamic specification is consistent with the prescribed equilibrium. Consistency in this sense requires that the short run dynamic adjustment be directed by the perceived disequilibrium and that eventual convergence to the equilibrium position be ensured. That two separate theoretical arguments, co-exist within the final specification is the root cause of many difficulties both theoretical and empirical.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 92 (1982)
Issue (Month): 367 (September)
|Contact details of provider:|| Postal: 2 Dean Trench Street, Westminster, SW1P 3HE|
Phone: +44 20 3137 6301
Web page: http://www.res.org.uk/
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishers.co.uk/asp/journal.asp?ref=0013-0133|
When requesting a correction, please mention this item's handle: RePEc:ecj:econjl:v:92:y:1982:i:367:p:615-29. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.