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Nonlinear error correction, asymmetric adjusment and cointegration

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  • Escribano, Álvaro
  • Pfann, Gerard

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.

Suggested Citation

  • Escribano, Álvaro & Pfann, Gerard, 1991. "Nonlinear error correction, asymmetric adjusment and cointegration," UC3M Working papers. Economics 2807, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:2807
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    References listed on IDEAS

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    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. 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.
    3. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    4. 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.
    5. 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.
    6. Phillips, P C B, 1991. "Optimal Inference in Cointegrated Systems," Econometrica, Econometric Society, vol. 59(2), pages 283-306, March.
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    Cited by:

    1. Granger, C.W.J. (Clive William John), 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.

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    Keywords

    Nonlinear Error Correction;

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