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Vector rational error correction

Listed author(s):
  • Sharon Kozicki
  • Peter A. Tinsley

Systems of forward-looking linear decision rules can be formulated as vector "rational" error correction models. The closed-form solution of the restricted error corrections is derived, and a full-information estimator is suggested. The error correction format indicates that the assumptions of convex adjustment costs and rational expectations impose different types of a priori restrictions on the dynamic structure of the error corrections. An empirical model of the producer decision rule for capital investment illustrates that the data rejects dynamic restrictions imposed by a standard model of adjustment costs but supports a more general description of convex frictions.

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File URL: http://www.kansascityfed.org/publicat/reswkpap/PDF/rwp98-03.pdf
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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number 98-03.

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Date of creation: 1998
Handle: RePEc:fip:fedkrw:98-03
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