User’s Guide : Multiple Equation Analysis : Vector Error Correction Models (VECMs)
Vector Error Correction Models (VECMs)
An important aspect of analyzing the interactions among a group of endogenous variables is the identification of joint long-run and short-run dynamics. While the long-run dynamics are associated with persistent forces and the notion of economic equilibrium, the short-run dynamics are associated with transitory adjustments to long-run states.
While vector autoregressive (VAR) models are ideally suited to the study of contemporaneous dynamics among endogenous variables, the vector error correction model (VECM) is a re-parameterization of the VAR process that is specifically designed for analyzing both the long-run and short-run dynamics driving the underlying variables.