Building Error Correction models

[John Andrews]

Dear all,

I have 2 variables x and y. y is the dependent variable.

I found that they are cointegrated. So I need to define the Error correction model (ECM).

So I run the simples ECM

reg d.y l.resid_1 d.x

But I find that the residuals from this regression are correlated. How can I eliminate serial residual correlation? I know that I have to add lags of d.y and d.x to the ECM, but is there any stata procedure that that allows me to end up with a final augmented ECM?

Best,
John

[Sebastian Kripfganz]

You might want to have a look at the ardl command:

• Kripfganz, S. and D. C. Schneider (2018). ardl: Estimating autoregressive distributed lag and equilibrium correction models. Proceedings of the 2018 London Stata Conference
• ARDL: Stata command for the estimation of autoregressive distributed lag and error correction models

[Shruti Gungabissoon]

Hello, I am doing a thesis on the impact of Foreign Direct Investment on Employment for Mauritius and so, I adopted the ARDL model because there was a mix of I(1) and I(0) variables. However, all my tests are significant and good. I just had the issue of multicollinearity and so, I wanted to know if multicollineaity matters in ARDL and should I leave it?

[Justin Niakamal]

See https://www.statalist.org/forums/for...=1587500490135 for the response to post #3.