Testing for the presence of non-linearity, long-run relationships and short-run dynamics in error correction model

by Hassan M.A. Hussein.

Abstract: Recent research has increasingly suggested that the demand deposit may be characterized by non-linear behavior. This paper examines whether such non-linear behavior is evident, not in the demand deposit themselves ,but in the adjustment of the demand deposit back to fundamental equilibrium. Thus, we examine whether a series of the demand deposit and currency outside banks exhibit non-linear error-correction dynamic behavior. In order to test the presence of non-linearity in the error-correction models an artificial regression error correction model can be developed , the model has been regarded as a generalization of a number of linear and non-linear models. Two types of non- linear error correction models can be captured as nested cases depending upon the shape of the transition function , the first is referred to as the Logistic error-correction (LEC) model , the second model is referred to as the exponential error-correction (EEC) model. Moreover ,we analyze some asymptotic properties such as long-run relationships and short-run dynamics in linear error correction models in small samples(T =25; 50) , by using simulation study which designed to shed some light on these properties. The empirical results showed that non-linear behavior is present specially in the currency outside banks series .The latter findings are ,the existence of short – run and long –run bi-directional causality between the demand deposit and currency outside in the sector of banks in Egypt.

Key Words: None

Hussein, H. M.A, hassanhassein@gmail.com

Editor: Ravi Khattree,khattree@oakland.edu

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