NONLINEAR ERROR-CORRECTION, ASYMMETRIC ADJUSTMENT AND COINTEGRATION

This article links the intertemporal choice model with the non-linear error correction (NEC) model. It has three main components. First, it outlines a model of non-linear error correction, in which the linear e rror correction term alpha'X-t (the vector time series X-t is cointegr ated, alpha is the cointegrating vector) is replaced by the non-linear term g(alpha'X-t), where g(.) is a non-linear function. Second, sever al types of asymmetries and the existence of multiple equilibria are d iscussed. The implications for the NEC model of trending targets are a lso explained. Third, it is shown that non-linear error correction is present in a trivariate series of UK employment, wage and capital stoc k. (C) 1998 Elsevier Science B.V.