Linear and Non-linear Models of Economic Time Series: An Introduction with Applications To Industrial Economics
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Abstract
Cubbin and Geroski (1987) propose a mechanism by which the profits of firms in an industry converge to a long-run equilibrium. Their model focuses on the interaction between profits and entry or exit of firms. To illustrate, consider the following simplified version, 10.1 E t  = α ρ t−1  +  u t ]] ρ t  = β E t  +  β 1    ρ t−1  + ε t ]] ρ t  = (αβ  +  β 1 )  ρ t−1  +β u t  +  ε t ]]<![CDATA[$${\rho _t}\; = \;(\alpha \beta \;\; + \;{\beta _1})\;{\rho _{t - 1}}\; + \beta {u_t}\; + \;{\varepsilon _t}$$