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

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

Editor: Ravi Khattree,khattree@oakland.edu

READING THE ARTICLE: You can read the article in portable document (.pdf) format (284012 bytes.)

NOTE: The content of this article is the intellectual property of the authors, who retains all rights to future publication.

This page has been accessed 1808 times since JULY 31, 2008.


Return to the InterStat Home Page.