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Vector rational error correction

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  • Sharon Kozicki
  • Peter A. Tinsley

Abstract

Systems of forward-looking linear decision rules can be formulated as vector \"rational\" error correction models. The closed-form solution of the restricted error corrections is derived, and a full-information estimator is suggested. The error correction format indicates that the assumptions of convex adjustment costs and rational expectations impose different types of a priori restrictions on the dynamic structure of the error corrections. An empirical model of the producer decision rule for capital investment illustrates that the data rejects dynamic restrictions imposed by a standard model of adjustment costs but supports a more general description of convex frictions.

Suggested Citation

  • Sharon Kozicki & Peter A. Tinsley, 1998. "Vector rational error correction," Research Working Paper 98-03, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:98-03
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    Keywords

    Vector autoregression; Rational expectations (Economic theory);

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