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Non-linear error correction, asymmetric adjustment and cointegration

  • Escribano, Alvaro
  • Pfann, Gerard A.

This paper has three main components. First, it outlines a model of nonlinear error correction (NEC) in which the linear error correction term a'Xt (the vector time series Xt is cointegrated, a is the cointegrating vector) is replaced by the nonlinear term g(a'X),ˇ where g(.) is a nonlinear function. Second, several types of asymmetries are discussed. The NEC model is shown to have an underlying structural model in the form of an adjustment cost model, with asymmetric adjustment costs. The implications for the NEC model of trending targets are explained. Third, it is shown that nonlinear error correction is present in a trivariate series of UK employment, wage, and capital stock.

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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. 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.
  2. Pfann, Gerard A., 1996. "Factor demand models with nonlinear short-run fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 315-331.
  3. 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.
  4. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers 127, Federal Reserve Bank of Minneapolis.
  5. PFANN, Gerard & PALM, Franz, 1992. "Asymmetric adjustment costs in non-linear labour demand models for the Netherlands and UK manufacturing sectors," CORE Discussion Papers 1992017, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Breusch, Trevor S & Wickens, Michael R., 1987. "Dynamic Specification, the Long Run and the Estimation of Transformed Regression Models," CEPR Discussion Papers 154, C.E.P.R. Discussion Papers.
  7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  8. J. P. Gould, 1968. "Adjustment Costs in the Theory of Investment of the Firm," Review of Economic Studies, Oxford University Press, vol. 35(1), pages 47-55.
  9. 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.
  10. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-56, September.
  11. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  12. 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.
  13. Franz C. PALM & Gerard A. PFANN, 1991. "Interrelation, Structural Changes and Cointegration in a Model for Manufacturing Demand in the Netherlands," Discussion Papers (REL - Recherches Economiques de Louvain) 1991031, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  14. 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).
  15. Phillips, P C B, 1991. "Optimal Inference in Cointegrated Systems," Econometrica, Econometric Society, vol. 59(2), pages 283-306, March.
  16. Herman J. Bierens & A. R. Gallant (ed.), 1997. "Nonlinear Models," Books, Edward Elgar Publishing, volume 0, number 878.
  17. Dolado, J. & Galbraith, J.W. & Banerjee, A., 1989. "Estimating Euler Equations With Integrated Series," Economics Series Working Papers 9981, University of Oxford, Department of Economics.
  18. Hylleberg, Svend & Mizon, Grayham E, 1989. "Cointegration and Error Correction Mechanisms," Economic Journal, Royal Economic Society, vol. 99(395), pages 113-25, Supplemen.
  19. Pfann, Gerald A. & Verspagen, Bart, 1989. "The structure of adjustment costs for labour in the Dutch manufacturing sector," Economics Letters, Elsevier, vol. 29(4), pages 365-371.
  20. Alvaro Escribano & Santiago Mira, 2001. "Nonlinear error correction models," Documentos de trabajo conjunto ULL-ULPGC 2001-03, Facultad de Ciencias Económicas de la ULPGC.
  21. 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.
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