Intercountry evidence on the performance of the simple error correction mechanism model of consumption

Abstract

This paper estimates a simple error correction mechanism (SECM) model of consumption a la Davidson, Hendry, Srba and Yeo (1978) for 13 OECD countries over the period 1951–1982. This is done for each country separately as well as for the pooled data. The basic results of this study are the following: (i) The SECM model appears as an adequate approximation to the data generating process on an individual country basis as well as in a pooled context. (ii) The pooled within estimator indicates a large and significant disequilibrium term while the between estimator indicates a small and insignificant disequilibrium term. This is consistent with the belief that the within estimator tend to yield short-run estimates while the between estimator tend to yield long-run estimates.