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

Adding a lagged dependent variable to the model can help reduce autocorrelation by capturing some of the time-series dependence that was previously unaccounted for. This is especially helpful when the autocorrelation is positive.

What Usually Happens to Autocorrelation When We Add a Lagged