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Error correction mechanisms and short-run expectations

Author

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  • Angelos A. Antzoulatos

Abstract

Reflecting the nature of economic decisions, the error correction mechanism (ECM) in the error-correction representation of a system of co-integrated variables may arise from forward-looking behavior. In such a case, the estimated ECM coefficients may misleadingly appear to be insignificant or to have the opposite-than-expected sign if the variables in the error-correction representation do not adequately capture short-run expectations. This paper explores the nature of this problem with a theoretical model for consumption and demonstrates how severe the problem can be with U.S. data. Because the conditions for similar erroneous inferences are likely to apply to many other settings, the paper also recommends a reexamination of the evidence in cases where the ECM appears to be insignificant or to display the \\"wrong\\" sign.

Suggested Citation

  • Angelos A. Antzoulatos, 1996. "Error correction mechanisms and short-run expectations," Staff Reports 10, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:10
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    Citations

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    Cited by:

    1. Antzoulatos, Angelos A., 1998. "Macroeconomic forecasts under the prism of error-correction models," Journal of Economics and Business, Elsevier, vol. 50(6), pages 535-550, November.

    More about this item

    Keywords

    ECM; income; cointegration; consumption;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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