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A comparison among partial adjustment, rational expectations and error correction estimates of the canadian demand for money
Author(s) -
Keil M. W.,
Richardson W.
Publication year - 1990
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950050307
Subject(s) - rational expectations , adaptive expectations , economics , econometrics , set (abstract data type) , mechanism (biology) , error detection and correction , monetary policy , short run , error correction model , cointegration , mathematical economics , computer science , macroeconomics , algorithm , philosophy , epistemology , programming language
Starting from a dynamic optimization principle, the currently most popular approaches to modelling money demand functions are derived. The partial adjustment/adaptive expectations, rational expectations, and error correction mechanism formulations are then estimated using a common data set. The error correction mechanism equation is found to dominate the others either because their implicit restrictions are rejected (rational expectations) or by employing the encompassing principle (partial adjustment/adaptive expectations). Surprisingly all three forms have similar long‐run solutions. Since the short‐run dynamics differ substantially, the results have important implications for the conduct of monetary policy.