Testing Dynamic Specification in Small Simultaneous Systems: An Application to a Model of Building Society Behaviour in the United Kingdom

Abstract

Abstract The approach evaluated here is that of simplifying an initial general system, which accounts for mis‐specifications in previous empirical models as predicted by the economic theory—a variant of encompassing. The underlying economic theory is a static long‐run solution of a dynamic adjustment process, to deliver a model form later recognized as an ‘error‐correction’ (or more properly, equilibrium‐correction) mechanism. The empirical analysis is for Building Societies (the UK equivalent of Savings and Loans).

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