Error correction mechanisms and short-run expectations

Angelos Antzoulatos ()

No 10, Staff Reports from Federal Reserve Bank of New York

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: ECM; income; cointegration; consumption (search for similar items in EconPapers)
JEL-codes: C22 C51 E21 (search for similar items in EconPapers)
Pages: 27 pages
Date: 1996-02-01
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr10.html (text/html)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr10.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:10

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().