Search Results
Showing results 1 to 1 of approximately 1.
(refine search)
Report
Error correction mechanisms and short-run expectations
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 ...