Error correction model

An error correction model is a dynamical system with the characteristics that the deviation of the current state from its long-run relationship will be fed into its short-run dynamics.

An error correction model is not a model that corrects the error in another model.

Contents

Long-run relationship

A rough long-run relationship can be determined by the cointegration vector[1], and then this relationship can be utilized to develop a refined dynamic model which can have a focus on long-run or transitory aspect such as the two VECM of a usual VAR in Johansen test.

VECM

A vector error correction model (VECM) adds error correction features to a multi-factor model such as a vector autoregression model.

Other sources

Davidson, J.E.H., D.F. Hendry, F. Srba, and J.S. Yeo (1978). Econometric modelling of the aggregate time-series relationship between consumers' expenditure and income in the United Kingdom. Economic Journal, 88, 661-692.

Notes

  1. ^ Engle and Granger, 1987, "Cointegration and error correction: Representation, estimate, and testing", Econometrica, 55, 251–276.

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