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Swiss Journal of Economics and Statistics

, Volume 145, Issue 1, pp 37–60 | Cite as

Biased Estimation in a Simple Extension of a Standard Error Correction Model

  • Christian Müller
Open Access
Article
  • 32 Downloads

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.

Keywords

policy analysis forecasting rational expectations error correction 

JEL-Classification

C51 E37 E47 C32 

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Copyright information

© Swiss Society of Economics and Statistics 2009

Authors and Affiliations

  1. 1.School of Management and LawZürich University of Applied SciencesWinterthurSwitzerland

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