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Error correction in DHSY

Author

Listed:
  • Eliasson, Ann-Charlotte

    (Deutsche Bank, Fixed Income & Relative Value Research)

  • Teräsvirta, Timo

    () (Dept. of Economic Statistics, Stockholm School of Economics)

Abstract

In this note, we consider the contradiction between the fact that the best fit for the UK consumption data in Davidson et al. (1978) is obtained using an equation with an intercept but without an error correction term, whereas the equation with error correction and without the intercept has better post-sample forecasting properties than the former equation. This contradiction is explained and the two equations reconciled in a nonlinear framework by applying a smooth transition regression model to the data.

Suggested Citation

  • Eliasson, Ann-Charlotte & Teräsvirta, Timo, 2002. "Error correction in DHSY," SSE/EFI Working Paper Series in Economics and Finance 517, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0517
    as

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    File URL: http://swopec.hhs.se/hastef/papers/hastef0517.pdf
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    References listed on IDEAS

    as
    1. Neil R. Ericsson & James G. MacKinnon, 2002. "Distributions of error correction tests for cointegration," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 285-318, June.
    2. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    3. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, number 9780521632423, May.
    4. Steven Cook & Sean Holly & Paul Turner, 1999. "DHSY revisited: the role of asymmetries," Applied Economics, Taylor & Francis Journals, vol. 31(7), pages 775-778.
    5. Steven Cook, 2000. "Frequency domain and time series properties of asymmetric error correction terms," Applied Economics, Taylor & Francis Journals, vol. 32(3), pages 297-304.
    6. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-692, December.
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    More about this item

    Keywords

    consumption equation; model misspecification testing; nonlinearity; smooth transition regression;

    JEL classification:

    • 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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