Interpreting Cointegrated Models
Error-correction models for cointegrated economic variables are commonly interpreted as reflecting partial adjustment of one variable to another. We show that error-correction models may also arise because one variable forecasts another. Reduced-form estimates of error-correction models cannot be used to distinguish these interpretations. In an application, we show that the estimated coefficients in the Marsh-Merton (1987) error-correction model of dividend behavior in the stock market are roughly implied by a near-rational expectations model wherein dividends are persistent and prices are disturbed by some persistent random noise. Their results thus do not demonstrate partial adjustment or 'smoothing' by managers, but may reflect little more than the persistence of dividends and the noiseness of prices.
|Date of creation:||1988|
|Date of revision:|
|Publication status:||Published in Journal of Economic Dynamics and Control|
|Contact details of provider:|| Postal: |
Web page: http://www.economics.harvard.edu/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:hrv:faseco:3221492. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ben Steinberg)
If references are entirely missing, you can add them using this form.