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Vector rational error correction

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  • Sharon Kozicki
  • Peter A. Tinsley

Abstract

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.

Suggested Citation

  • Sharon Kozicki & Peter A. Tinsley, 1998. "Vector rational error correction," Research Working Paper 98-03, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:98-03
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    Cited by:

    1. Giovanni Angelini & Luca Fanelli, 2016. "Misspecification and Expectations Correction in New Keynesian DSGE Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(5), pages 623-649, October.
    2. Kozicki, Sharon & Tinsley, P. A., 2002. "Dynamic specifications in optimizing trend-deviation macro models," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1585-1611, August.
    3. Marc-André Gosselin & René Lalonde, 2004. "Modélisation « PAC » du secteur extérieur de l'économie américaine," Staff Working Papers 04-3, Bank of Canada.
    4. David Aristei & Luca Pieroni, 2010. "Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: A Multivariate Dynamic Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(4), pages 428-457, August.
    5. Kiley, Michael T., 2001. "Computers and growth with frictions: aggregate and disaggregate evidence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 55(1), pages 171-215, December.
    6. Òscar Jordà & Sharon Kozicki, 2007. "Estimation and Inference by the Method of Projection Minimum Distance," Staff Working Papers 07-56, Bank of Canada.
    7. Giacinto Micucci & Valter di Giacinto, 2009. "The Producer Service Sector in Italy: Long-term Growth and its Local Determinants," Spatial Economic Analysis, Taylor & Francis Journals, vol. 4(4), pages 391-425.
    8. Fanelli, Luca, 2006. "Multi-equational linear quadratic adjustment cost models with rational expectations and cointegration," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 445-456, March.
    9. Sharon Kozicki & Peter A. Tinsley, 2002. "Alternative sources of the lag dynamics of inflation," Research Working Paper RWP 02-12, Federal Reserve Bank of Kansas City.
    10. Luca Fanelli, 2009. "Estimation of quasi-rational DSGE monetary models," Quaderni di Dipartimento 3, Department of Statistics, University of Bologna.
    11. Rochelle M. Edge & Thomas Laubach & John C. Williams, 2003. "The responses of wages and prices to technology shocks," Working Paper Series 2003-21, Federal Reserve Bank of San Francisco.
    12. Jeffrey C. Fuhrer & Giovanni P. Olivei, 2005. "Estimating forward-looking Euler equations with GMM estimators: an optimal-instruments approach," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 87-114.
    13. Ireland, Peter N., 2001. "Sticky-price models of the business cycle: Specification and stability," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 3-18, February.
    14. Jeanfils, Philippe & Burggraeve, Koen, 2008. ""NONAME": A new quarterly model for Belgium," Economic Modelling, Elsevier, vol. 25(1), pages 118-127, January.
    15. Olivier Gervais & Marc-André Gosselin, 2014. "Analyzing and Forecasting the Canadian Economy through the LENS Model," Technical Reports 102, Bank of Canada.
    16. Meurers Martin, 2004. "Estimating Supply and Demand Functions in International Trade: A Multivariate Cointegration Analysis for Germany / Die Schätzung von Angebots- und Nachfragefunktionen im Außenhandel: Eine multivariate," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 224(5), pages 530-556, October.
    17. Marc-André Gosselin & René Lalonde, 2003. "Un modèle « PAC » d'analyse et de prévision des dépense des ménages américains," Staff Working Papers 03-13, Bank of Canada.
    18. Kozicki, Sharon, 2012. "Macro has progressed," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 23-28.
    19. Fanelli, Luca, 2007. "Evaluating the New Keynesian Phillips Curve under VAR-based learning," MPRA Paper 1616, University Library of Munich, Germany.
    20. Fanelli, Luca, 2008. "Evaluating New Keynesian Phillips Curve under VAR-Based Learning," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 2, pages 1-24.
    21. Peter von zur Muehlen, 2001. "The effect of past and future economic fundamentals on spending and pricing behavior in the FRB/US macroeconomic model," Finance and Economics Discussion Series 2001-12, Board of Governors of the Federal Reserve System (U.S.).
    22. Fanelli, Luca, 2002. "A new approach for estimating and testing the linear quadratic adjustment cost model under rational expectations and I(1) variables," Journal of Economic Dynamics and Control, Elsevier, vol. 26(1), pages 117-139, January.

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    Keywords

    Vector autoregression ; Rational expectations (Economic theory);

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