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Biased Estimation in a Simple Extension of a Standard Error Correction Model
Swiss Journal of Economics and Statistics volume 145, pages 37–60 (2009)
Summary
This paper considers an expectations augmented version of the Engle and Granger (1987) error correction model and shows that standard inference about the adjustment coefficients can be severely biased. This bias has implications for long-run causality and impulse-response analysis in particular. However, a sometimes simple remedy exists which only requires some additional regressions. The results are illustrated with popular macroeconomic relationships like the Fisher relation and uncovered interest parity hypothesis using U.S., German and Swiss data.
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I thank Erdal Atukeren, Rocco Mosconi, and an anonymous referee for many helpful comments. The usual disclaimer applies.
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Müller, C. Biased Estimation in a Simple Extension of a Standard Error Correction Model. Swiss J Economics Statistics 145, 37–60 (2009). https://doi.org/10.1007/BF03399274
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DOI: https://doi.org/10.1007/BF03399274