DP265 Error Correction Models, Co-integration and the Internal Model Principle

Author(s): Mark Salmon
Publication Date: September 1988
Keyword(s): Co Integration, Dynamic Models, Error-Correction Models, Feedback Rules, Specification
JEL(s): 211, 212
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=265

The paper considers the conditions under which a system of dynamic equations will be consistent with some prespecified multivariate equilibrium specification. Connections are also drawn between what is known as 'the internal model principle' in the design of robust linear feedback rules and recent developments in the analysis of multivariate error correction models and the theory of co-integration. This approach not only clarifies and generalizes our understanding of error correction systems, but also suggests a relatively simple method for determining whether a given dynamic system satisfies the conditions for representation as an error correction specification.