In a VECM,
A)past values of Yt - θ Xt help to predict future values of ΔYt and/or ΔXt.
B)errors are corrected for serial correlation using the Cochrane-Orcutt method.
C)current values of Yt - θ Xt help to predict future values of ΔYt and/or ΔXt.
D)VAR techniques,such as information criteria,no longer apply.

Question

Quizplus · Accepted Answer

In a VECM, past values of Yt - θ Xt are used to predict future values of ΔYt and/or ΔXt. This is because the long-run equilibrium relationship between the variables can be captured by the error correction term, which includes the deviations of Yt - θ Xt from their equilibrium values. Therefore, these past deviations are important for predicting future changes in the variables. The Cochrane-Orcutt method is a technique for correcting for serial correlation in the errors of a regression model and is not specific to VECMs. VAR techniques, such as information criteria, still apply to VECMs.