Abstract
Betancourt/Kelejian [1981] have recently warned against using the Cochrane-Orcutt procedure in models which include a lagged endogenous variable because this procedure can have more than onefixed point even asymptotically. FollowingSargan [1964], we argue instead that fixed points are not necessarily minima and that the question of practical importance is whether the residual sum of squares can have multipleminima. Within this formulation of the problem, we provide the firstreal example of multiple minima obtainable by the Cochrane-Orcutt procedure — with or without a lagged endogenous variable — and use it to caution against routine use of this procedure.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Betancourt, R., andH. Kelejian: Lagged Endogenous Variables and the Cochrane-Orcutt Procedure. Econometrica49 (4), 1981, 1073–1079.
Cochrane, D., andG.H. Orcutt: Application of Least Squares Regression to Relationships Containing Autocorrelated Error Terms. Journal of the American Statistical Association44, 1949, 32–61.
Cooper, J.P.: Asymptotic Covariance Matrix of Procedures for Linear Regression in the Presence of First Order Autoregressive Disturbances. Econometrica40, 1972, 305–310.
Dufour, J.-M., M.J.I. Gaudry, andT.C. Liem: The Cochrane-Orcutt Procedure: Numerical Examples of Multiple Admissible Minima. Economics Letters6 (1), 1980, 43–48.
Hafer, R. W., andS.E. Hein: The Dynamics and Estimation of Short-Run Money Demand. Federal Reserve Bank of St. Louis Review62 (3), 1980, 6–35.
Johnston, J.: Econometric Methods. 2nd. Ed. New York 1972.
Klein, L.R.: A Textbook of Econometrics. Second Ed. Englewood Cliffs, N.J. 1974.
Oberhofer, W. andJ. Kmenta: A General Procedure for Obtaining Maximum Likelihood Estimates in Generalized Regression Models. Econometrica42, 1974, 579–590.
Sargan, J.D.: Wages and Prices in the United Kingdom: A Study in Econometric Methodology. Econometric Analysis for National Economic Planning. Ed. by P.E. Hart et al. London 1964, 25–63.
Author information
Authors and Affiliations
Additional information
The Research and Development Centre of Transport Canada and the F.C.A.C. program of theministŕe de l'Education du Québec have supported the basic related research which made this article possible. The authors thank Marcel G. Dagenais, Christian Gouriéroux, Daniel Racette and Arnold Zellner for useful comments and T.C. Liem for performing the computations. The first version of this paper was entitled “A Warning on the Use of the Cochrane-Orcutt Procedure Based on a Real Example Containing a Lagged Endogenous Variable”, [cahier No. 8109, département de sciences économiques, Université de Montréal, April 1981]. It is available from the authors on request.
Rights and permissions
About this article
Cite this article
Dufour, J.M., Gaudry, M.J.I. & Hafer, R.W. A warning on the use of the Cochrane-Orcutt procedure based on a money demand equation. Empirical Economics 8, 111–117 (1983). https://doi.org/10.1007/BF01973194
Received:
Revised:
Issue Date:
DOI: https://doi.org/10.1007/BF01973194