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Non-linear error correction, asymmetric adjustment and cointegration

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  • Escribano, Alvaro
  • Pfann, Gerard A.

Abstract

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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  • Escribano, Alvaro & Pfann, Gerard A., 1998. "Non-linear error correction, asymmetric adjustment and cointegration," Economic Modelling, Elsevier, vol. 15(2), pages 197-216, April.
  • Handle: RePEc:eee:ecmode:v:15:y:1998:i:2:p:197-216
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    Cited by:

    1. Frédérique Bec & Anders Rahbek, 2004. "Vector equilibrium correction models with non-linear discontinuous adjustments," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 628-651, December.
    2. Costas Milas & Jesús Otero & Theodore Panagiotidis, 2004. "Forecasting the spot prices of various coffee types using linear and non-linear error correction models," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(3), pages 277-288.
    3. Raghbendra Jha & Hari K. Nagarajan, 2002. "Noisy Vertical Markets," ASARC Working Papers 2002-04, The Australian National University, Australia South Asia Research Centre.
    4. Ana Maria Iregui & Jesus Otero, 2003. "On the dynamics of unemployment in a developing economy: Colombia," Applied Economics Letters, Taylor & Francis Journals, vol. 10(14), pages 895-898.
    5. Kenny, Geoff, 2003. "Asymmetric adjustment costs and the dynamics of housing supply," Economic Modelling, Elsevier, vol. 20(6), pages 1097-1111, December.
    6. Mohamed E AROURI & Fredj JAWADI & Duc K NGUYEN, 2012. "Nonlinear modeling of oil and stock price dynamics: segmentation or time-varying integration?," Economics Bulletin, AccessEcon, vol. 32(3), pages 2481-2489.
    7. Holmes Mark J. & Panagiotidis Theodore, 2009. "Cointegration and Asymmetric Adjustment: Some New Evidence Concerning the Behavior of the U.S. Current Account," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-25, June.
    8. Baghli Mustapha, 2005. "Nonlinear Error-Correction Models for the FF/DM Rate," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(1), pages 1-43, March.
    9. Theodore Panagiotidis, 2010. "Market efficiency and the Euro: the case of the Athens stock exchange," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 37(3), pages 237-251, July.
    10. Legrenzi, G. & Milas, C., 2004. "Non-linear adjustments in fiscal policy," Working Papers 04/06, Department of Economics, City University London.
    11. Gabriella Legrenzi & Costas Milas, 2006. "Asymmetric and Non-Linear Adjustments in Local Fiscal Policy," Keele Economics Research Papers KERP 2006/16, Centre for Economic Research, Keele University.
    12. Steven Cook & Sean Holly, 2002. "A statistical analysis of regime switching under asymmetric error correction," Applied Economics Letters, Taylor & Francis Journals, vol. 9(4), pages 275-278.
    13. Corrado, Luisa & Holly, Sean, 2003. "Nonlinear Phillips curves, mixing feedback rules and the distribution of inflation and output," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 467-492, December.
    14. David McMillan & Angela Black, 2001. "Nonlinear error correction in spot and forward exchange rates," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 137(4), pages 737-750, December.
    15. David McMillan, 2008. "Non-linear cointegration and adjustment: an asymmetric exponential smooth-transition model for US interest rates," Empirical Economics, Springer, vol. 35(3), pages 591-606, November.
    16. Steven Cook, 2000. "The alternative asymmetric behaviour of Australian consumers' expenditure," Applied Economics Letters, Taylor & Francis Journals, vol. 7(6), pages 349-352.
    17. Theo Panagiotidis & Mark J Holmes, 2005. "Sustainability and Asymmetric Adjustment: Some New Evidence Concerning Behaviour of the US Current Account," Money Macro and Finance (MMF) Research Group Conference 2005 29, Money Macro and Finance Research Group.
    18. Anis Omri & Mohamed Frikha, 2011. "No Contagion, Only Interdependence During the US Sub-Primes Crisis," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 18(2), pages 286-298, December.
    19. Sean Holly & Paul Turner & Melvyn Weeks, 2003. "Asymmetric Adjustment and Bias in Estimation of an Equilibrium Relationship from a Cointegrating Regression," Computational Economics, Springer;Society for Computational Economics, vol. 21(3), pages 195-202, June.
    20. Jesus Otero & Manuel Ramirez, 2002. "On the determinants of the inflation rate in Colombia: a disequilibrium market approach," BORRADORES DE INVESTIGACIÓN 003296, UNIVERSIDAD DEL ROSARIO.
    21. Granger, C.W.J. (Clive William John) & Escribano, Álvaro, 1995. "Investigating the relationship between gold and silver prices," DES - Working Papers. Statistics and Econometrics. WS 4517, Universidad Carlos III de Madrid. Departamento de Estadística.
    22. Steven Cook, 2001. "Regime switching and the forecasting bias of asymmetric error correction models," Applied Economics Letters, Taylor & Francis Journals, vol. 8(9), pages 569-571.

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