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yt=β 0+βxt+ β 2 xt−1+ α 1 yt−1+ μt

The document discusses an economic model where there is a long-run equilibrium relationship between two variables, but there may be disequilibrium in the short-run. The model includes an error correction mechanism where a proportion of the disequilibrium from one period is corrected in the next period. It then provides equations to represent the long-run and short-run relationships and examines the conditions under which the short-run model is consistent with the long-run model.

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Ridwan Kurniawan Kapindo
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36 views

yt=β 0+βxt+ β 2 xt−1+ α 1 yt−1+ μt

The document discusses an economic model where there is a long-run equilibrium relationship between two variables, but there may be disequilibrium in the short-run. The model includes an error correction mechanism where a proportion of the disequilibrium from one period is corrected in the next period. It then provides equations to represent the long-run and short-run relationships and examines the conditions under which the short-run model is consistent with the long-run model.

Uploaded by

Ridwan Kurniawan Kapindo
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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The principle of this model is that there often exist a long run equilibrium relationship between 2

economic variables. In the short run, there maybe disequilibrium. With error correctionin

mechanism, the proportion of the disequiibrium in one period is corrected in next period.

Suppose that the long run relation between Yt and Xt is of the form

Yt = KXt (10.20)

K is a fixed constant

Taking logarithms of both sides of equation (10.20), we obtain

Ln Yt = ln K + ln Xt or yt = k + xt (10.21)

Where the lowercase letters are used to denote logarithms. Because yt-1= k + xt-1, we have,

Delta yt = delta xt (10.22)

Delta adalah perubahan dari periode t-1 ke t.

A general short run model with lagged adjustment is of the following form :

yt =β 0+ βxt+ β 2 xt −1+ α 1 yt −1+ μt (10.23)

Under what conditions will the short run model be consistent with the long run model? To

examine this question, let yt = y* and xt = x* for all t. jadi (setting mut=0 in the long run) :

Y*(1-alpha1) = beta0 + (beta1 + beta2)x*

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