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Interpreting an Error Correction Model: Partial Adjustment, Forward-Looking Behaviour, and Dynamic International Money Demand

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  • Domowitz, Ian
  • Hakkio, Craig S

Abstract

An error correction model is derived from a stochastic dynamic programming problem incorporating rational expectations. A parametric restriction is derived that allows a test for the theoretical proposition that the optimal strategy behind the error correction form entails the failure to asymptotically close the gap between the choice variable and the growing target. This is accomplished by nesting a partial adjustment model with forward-looking expectations within the error correction paradigm. The counterintuitive behavior embodied in the error correction model is not supported by the data in the context of a cross-country comparison of cash balances relationships. Copyright 1990 by John Wiley & Sons, Ltd.

Suggested Citation

  • Domowitz, Ian & Hakkio, Craig S, 1990. "Interpreting an Error Correction Model: Partial Adjustment, Forward-Looking Behaviour, and Dynamic International Money Demand," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(1), pages 29-46, January-M.
    • Handle: RePEc:jae:japmet:v:5:y:1990:i:1:p:29-46
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    Citations

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    Cited by:

    1. Augustine Arize & Steven Shwiff, 1998. "The black market exchange rate and demand for money in sixteen developing countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 4(2), pages 128-143, May.
    2. Arize, A. C. & Shwiff, Steven S., 1998. "The appropriate exchange-rate variable in the money demand of 25 countries: an empirical investigation," The North American Journal of Economics and Finance, Elsevier, vol. 9(2), pages 169-185, December.
    3. Alberto Bagnai & Christian Alexander Mongeau Ospina, 2014. "The a/simmetrie annual macroeconometric model of the Italian economy: structure and properties," a/ Working Papers Series 1405, Italian Association for the Study of Economic Asymmetries, Rome (Italy).
    4. Arize, A. C. & Malindretos, John & Grivoyannis, Elias C., 2005. "Inflation-rate volatility and money demand: Evidence from less developed countries," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 57-80.
    5. Engsted, Tom & Haldrup, Niels, 1997. "Money demand, adjustment costs, and forward-looking behavior," Journal of Policy Modeling, Elsevier, vol. 19(2), pages 153-173, April.
    6. Arize, Augustine C. & Malindretos, John & Shwiff, Steven S., 1999. "Structural breaks, cointegration, and speed of adjustment Evidence from 12 LDCs money demand," International Review of Economics & Finance, Elsevier, vol. 8(4), pages 399-420, November.
    7. Mr. Subramanian S Sriram, 1999. "Survey of Literature on Demand for Money: Theoretical and Empirical Work with Special Reference to Error-Correction Models," IMF Working Papers 1999/064, International Monetary Fund.
    8. A. C. Arize, 1994. "An Econometric Analysis of Money Demand in Taiwan, 1950–1989," The American Economist, Sage Publications, vol. 38(1), pages 27-35, March.
    9. James Boughton, 1992. "International comparisons of money demand," Open Economies Review, Springer, vol. 3(3), pages 323-343, October.

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