Should we Distinguish Between Static and Dynamic Long Run Equilibrium in Error Correction Models?

Abstract

This paper shows that there is no theoretical foundation to distinguish between static and dynamic long run equilibrium in error correction models with deterministically cointegrated variables, and so, that the so-called dynamic homogeneity restriction aimed at guaranteeing that the two solutions coincide, also lacks a theoretical justification. Examples in which dynamic homogeneity cannot hold are also discussed.