Vector rational error correction

Sharon Kozicki and Peter Tinsley

No 98-03, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: Systems of forward-looking linear decision rules can be formulated as vector \"rational\" error correction models. The closed-form solution of the restricted error corrections is derived, and a full-information estimator is suggested. The error correction format indicates that the assumptions of convex adjustment costs and rational expectations impose different types of a priori restrictions on the dynamic structure of the error corrections. An empirical model of the producer decision rule for capital investment illustrates that the data rejects dynamic restrictions imposed by a standard model of adjustment costs but supports a more general description of convex frictions.

Keywords: Vector autoregression; Rational expectations (Economic theory) (search for similar items in EconPapers)
Date: 1998
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Rational Error Correction (2002)
Journal Article: Vector rational error correction (1999)
Working Paper: Rational error correction (1998)
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