Error Correction Mechanisms and Short-Run Expectations

27 Pages Posted: 22 Jun 2007

See all articles by Angelos A. Antzoulatos

Angelos A. Antzoulatos

University of Piraeus - Department of Banking and Financial Management

Date Written: February 1996

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.

Keywords: error correction mechanism

JEL Classification: C22, C51, E21

Suggested Citation

Antzoulatos, Angelos A., Error Correction Mechanisms and Short-Run Expectations (February 1996). FRB of New York Staff Report No. 10, Available at SSRN: https://ssrn.com/abstract=993895 or http://dx.doi.org/10.2139/ssrn.993895

Angelos A. Antzoulatos (Contact Author)

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
216
Abstract Views
1,323
rank
168,158
PlumX Metrics