What usually happens to autocorrelation when we add a lagged dependent variable to the model?
A) Autocorrelation gets bigger.
B) Autocorrelation gets smaller.
C) Autocorrelation stays the same.
D) We cannot test for autocorrelation when a lagged dependent variable is included in the model.

Question

Quizplus · Accepted Answer

Including a lagged dependent variable in the model usually reduces autocorrelation. This is because the inclusion of the lagged dependent variable captures some of the autocorrelation that was present in the model without the variable.

What Usually Happens to Autocorrelation When We Add a Lagged