Premium
ON ERROR CORRECTION MODELS: SPECIFICATION, INTERPRETATION, ESTIMATION
Author(s) -
Alogoskoufis George,
Smith Ron
Publication year - 1991
Publication title -
journal of economic surveys
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.657
H-Index - 92
eISSN - 1467-6419
pISSN - 0950-0804
DOI - 10.1111/j.1467-6419.1991.tb00128.x
Subject(s) - econometrics , estimation , specification , error correction model , interpretation (philosophy) , economics , error detection and correction , econometric model , regression , process (computing) , mathematical economics , computer science , mathematics , cointegration , statistics , algorithm , programming language , operating system , management
. Error Correction Models (ECMs) have proved a popular organising principle in applied econometrics, despite the lack of consensus as to exactly what constitutes their defining characteristic, and the rather limited role that has been given to economic theory by their proponents. This paper uses a historical survey of the evolution of ECMs to explain the alternative specifications and interpretations and proceeds to examine their implications for estimation. The various approaches are illustrated for wage equations by application to UK labour market data 1855–1987. We demonstrate that error correction models impose strong and testable non‐linear restrictions on dynamic econometric equations, and that they do not obviate the need for modelling the process of expectations formation. With the exception of a few special cases, both the non‐linear restrictions and the modelling of expectations have been ignored by those who have treated ECMs as merely reparameterisations of dynamic linear regression models or vector autoregressions.