SPEED OF ADJUSTMENT AND ESTIMATION OF THE PARTIAL ADJUSTMENT MODEL

The effect which the speed of adjustment parameter has on the statisti cal properties of the partial adjustment model, and estimates of its p arameters, is investigated. It is shown that in the case of very rapid adjustment, the model approaches a classical (static) regression mode l, but in the case of very slow adjustment, the dependent (or state) v ariable displays near random walk behaviour. The finite sample perform ance of the nonlinear least squares estimator is investigated in a sim ulation study, and it is found that substantial bias and mean squared error can be a feature of the estimates in the model with very slow ad justment. This suggests that extreme caution should be exercised in si tuations where the estimated speed of adjustment parameter is found to be small.