The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Equilibrium-Correction Models

  • David F. Hendry
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2025

Abstract

The equilibrium-correction class of econometric models is surprisingly large, and includes regression equations, autoregressive-error models, autoregressive distributed-lags, simultaneous equations, autoregressive conditional heteroskedastic processes and generalized ARCH, vector autoregressions and dynamic stochastic general equilibrium systems, among others. Moreover, its properties are relatively generic for all members. Following an historical overview of its origins in error corrections and control mechanisms on the one hand and cointegration on the other, its properties are described, leading to an explanation as to why the ubiquitous class of equilibrium-correction models is prone to forecast failure in processes that are non-stationary from location shifts.

Keywords

Adjustment costs Autoregressive distributed-lag models Autoregressive-error models Cointegration Common factors Control mechanisms Differencing Dynamic stochastic general equilibrium (DGSE) models Equilibrium-correction models Error-correction models Forecast failure GARCH processes Linear-quadratic models Partial equilibrium Stationarity Unit roots Vector autoregressions 
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Notes

Acknowledgment

Financial support from the ESRC under Professorial Research Fellowship RES051270035 is gratefully acknowledged, as are helpful comments from Gunnar Bårdsen, Julia Campos, Jennifer Castle, Mike Clements, Søren Johansen and Graham Mizon.

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • David F. Hendry
    • 1
  1. 1.