Suppose that X is strictly exogenous. A researcher estimates an ADL(1,1) model, calculates the regression residual

Question:

Suppose that X is strictly exogenous. A researcher estimates an ADL(1,1) model, calculates the regression residual, and finds the residual to be highly serially correlated. Should the researcher estimate a new ADL model with additional lags or simply use HAC standard errors for the ADL(1,1) estimated coefficients?

Answer:

Serially correlation error can generally be reduced by increasing the lag in the ADL model.

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