Error Correction Mechanisms

The dynamics of entry, exit and profitability: An error correction approach for the retail industry

“…This is the basic idea behind our modelling of the dynamic interaction between profitability and net entry. Our model consists of two equations and is of an error correction mechanism type (see Gilbert (1986) and Salmon (1982)). -AQit --ao + al(~i,t- …”

Developments in the Study of Cointegrated Economic Variables

“…If z is not 1(0), i.e., if x, Yt are not cointegrated, then the z. term does not belong in these equations given that the dependent variables are 1(0) and hence at least one of Pi, p2 does not vanish. These models were introduced into economics by Sargan (1964) and Phillips (1957) and have generated a lot of interest following the work of Davidson, Hendry, Srba and Yeo (1978), von Ungern Sternberg (1980), Curry (1981), Dawson (1981) and Salmon (1982) amongst others. The models are seen to incorporate equilibrium relationships, perhaps suggested by an economic theory of the long-run, with the type of dynamic model favoured by time-series econometricians.…”

Interpreting cointegrated models

“…He derives deterministic equations relating agents' forecasts to the history of the variable they are forecasting. Salmon [1982] appeals to random optimization error to break the deterministic relationship. 7 agents' rational expectations of the future of another variable (the short-tern' interest rate) which follows an integrated protess.…”