FRB: Conditional and Structural Error Correction Models

International Finance Discussion Papers

Conditional and Structural Error Correction Models
Neil R. Ericsson
1994-487 (October 1994)

Abstract: A "structural" error correction model (in Boswijk's sense) is a rep�resentation of a conditional error correction model that satisfies certain restrictions. This paper examines the conditions under which such a struc�tural error correction model exists and when the associated representation is of interest. To clarify the nature of such models, several analytical and empirical examples are considered, which violate those conditions. Structural error correction models are economically appealing, but their limitations imply that some care must be taken when applying them in practice.

Full paper(202 KB PDF)

Keywords
Boswijk, cointegration, conditional models, dynamic specification, encompassing, error correction, exogeneity, general-to-specific modeling, sequential reduction, structural models, vector autoregression.

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