Cointegration Theory, Equilibrium and Disequilibrium Economics

12 Pages Posted: 5 Apr 2004

See all articles by Karim M. Abadir

Karim M. Abadir

Imperial College Business School

Abstract

Two variables are said to be cointegrated when they move closely together over time, after proper scaling. Cointegration was taken to be the statistical expression of the notion of equilibrium in economics. But is it still possible to talk of cointegration when 'disequilibrium' economics prevail? We argue that it is, and that the duality is strongest between cointegration theory and economic theories of non-clearing markets. By setting up a simple generic non-parametric model, it is shown that Clower's dual decision hypothesis is a more direct and natural expression of the notion of cointegration than long-run equilibrium is. With sticky prices, quantities (e.g. consumption and income) move together more closely than they would otherwise. As a by-product, the model gives rise to (and justifies from an economics standpoint) a recent statistical approach to modelling economic time series. An observational equivalence between two econometric models is also presented.

Suggested Citation

Abadir, Karim M., Cointegration Theory, Equilibrium and Disequilibrium Economics. Manchester School, Vol. 72, No. 1, pp. 60-71, January 2004. Available at SSRN: https://ssrn.com/abstract=513759

Karim M. Abadir (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www3.imperial.ac.uk/portal/page?_pageid=61,629646&_dad=portallive&_schema=PORTALLIVE

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