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where A denotes the first difference and y is the error correction term (the cointegration term) lagged by one period, indicating the speed of adjustment toward the long-run equilibrium.
If the error correction term produces a positive effect on the variables, we can consider the Fed's action as destabilizing over short-run variables in their efforts to keep) these long-run interlinkages.
Error correction term contains the long-run information since it is derived from the long-run cointegrating relationship.
To estimate error correction models, the first difference of each variable is regressed upon the error correction term and lagged values of the first difference of each variable.
Looking at the results in Table 5, we see that the coefficient of the error correction term, [[lambda].
However, the coefficient on the error correction term when the budget is worsening is significant in the revenue and expenditure equations.
The autocorrelation coefficient for the error correction term has been relatively low in the 1990s, which should increase the likelihood that no cointegration among the variables will be rejected.
Sales--Results based on the VECM (Table 4) indicates that in the short run, each explanatory variable (A and P) significantly Granger-cause sales (as reflected in the significance of the F-tests of the lags of the explanatory variables), but the proportion by which the sales (S) variable adjusted endogenously in the short run to its long-term equilibrium relationship with other cointegrating variables is nevertheless significant (as evidenced in the significance of the t-test of the lagged error correction term derived from the long-term cointegrating relationship).