A Note on the Interpretation of Error Correction Coefficients

This paper provides empirical evidence for standard economic equilibrium relationships and shows that the estimated disequilibrium adjustment mechanisms appear running counter to intuition. For example, the German interest rate seems to adjust to Swiss rates but not vice versa implying a driving role of the Swiss with respect to the German rates. It is argued that this phenomenon is due to the well-known difficulties of unveiling causal structures by regression. However, under certain circumstances a simple regression sequence can produce valuable information about the true causalities. The results are illustrated using U.S., Japanese, German and Swiss data. JEL classification: C51, E37, E47, C32