Error correction in DHSY

Ann-Charlotte Eliasson and Timo Teräsvirta
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Ann-Charlotte Eliasson: Deutsche Bank, Fixed Income & Relative Value Research, Postal: Grosse Gallustrasse 10-14, EG, D-60323 Frankfurt am Main, Germany

No 517, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: In this note, we consider the contradiction between the fact that the best fit for the UK consumption data in Davidson et al. (1978) is obtained using an equation with an intercept but without an error correction term, whereas the equation with error correction and without the intercept has better post-sample forecasting properties than the former equation. This contradiction is explained and the two equations reconciled in a nonlinear framework by applying a smooth transition regression model to the data.

Keywords: consumption equation; model misspecification testing; nonlinearity; smooth transition regression (search for similar items in EconPapers)
JEL-codes: C22 E21 (search for similar items in EconPapers)
Pages: 8 pages
Date: 2002-11-21
New Economics Papers: this item is included in nep-ets
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0517

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