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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 517:
Error correction in DHSY

Ann-Charlotte Eliasson and Timo Teräsvirta ()

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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