COINTEGRATION THEORY, EQUILIBRIUM AND DISEQUILIBRIUM ECONOMICS*

Paper number: 94/07

Year: 1994

Paper Category: Discussion Paper

Authors

Karim M.Abadir
University of Exeter

Abstract

Two or more variables are said to be cointegrated when they move closely togather over time, after proper scaling. Cointegration was taken to be the statistical expression of the notion of equilibrium in economics. But is it still possible to talk of cointegration when "disequilibrium" economics prevails? This note argues that it is, and that the duality is strongest between cointegration theory and economic theories of nonclearing markets. By setting up a simple model, it is shown that Clower's (1965) Dual Decision Hypothesis is a more direct and natural expression of the notion of cointegration than Walrasian equilibrium is.

JEL Classification numbers: C22, E12.
Keywords: Cointegration, Nonclearing markets, Dual Decision Hypothesis (DDH).

* I wish to thank the participants at the Exeter lunchtime workshop for constructive comments on this note.