NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Interpreting Cointegrated Models

John Y. Campbell, Robert J. Shiller

NBER Working Paper No. 2568 (Also Reprint No. r1175)
Issued in April 1988
NBER Program(s):   ME

Error-correction models for cointegrated economic variables are commonly interpreted as reflecting partial adjustment of one variable to another. We show that error-correction models may also arise because one variable forecasts another. Reduced-form estimates of error-correction models cannot be used to distinguish these interpretations. In an application, we show that the estimated coefficients in the Marsh-Merton [I9871 error-correction model of dividend behavior in the stock market are roughly implied by a near-rational expectations model wherein dividends are persistent and prices are disturbed by some persistent random noise. Their results thus do not demonstrate partial adjustment or "smoothing" by managers, but may reflect little more than the persistence of dividends and the noisiness of prices.

download in pdf format
   (500 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w2568

Published: Campbell, John Y. and Robert J. Shiller. "Interpreting Cointegrated Models ," from the Journal of Economic Dynamics and Control, Vol. 12,pp. 505-522, (1988). citation courtesy of

 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us