Error correction model

An error correction model (ECM) is a type of time series model commonly applied when the underlying variables share a long-run stochastic trend, a property known as cointegration. ECMs provide a theoretically grounded framework for estimating both short-run dynamics and long-run relationships among variables.

The term error correction refers to the idea that deviations from the long-run equilibrium (the error) affect short-run adjustments. In this framework, the model directly estimates the speed at which a dependent variable returns to equilibrium following changes in other explanatory variables.

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