SSE/EFI Working Paper Series in Economics and Finance
Ann-Charlotte Eliasson and Timo Teräsvirta
Error correction in DHSY
Abstract: In this note, we consider the contradiction between the
fact that the best fit for the UK consumption data in Davidson et al.
(1978) is obtained using an equation with an intercept but without an error
correction term, whereas the equation with error correction and without the
intercept has better post-sample forecasting properties than the former
equation. This contradiction is explained and the two equations reconciled
in a nonlinear framework by applying a smooth transition regression model
to the data.
Keywords: consumption equation; model misspecification testing; nonlinearity; smooth transition regression; (follow links to similar papers)
JEL-Codes: C22; E21; (follow links to similar papers)
8 pages, November 21, 2002
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