UNIT 11 AUTOREGRESSIVE AND DISTRIBUTED LAG MODELS
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Structure
1 1.0 Objectives

1 1.1 Introduction

1 1.2 Models With Lags
1 1.2.1 1 1.2.2 1 1.2.3 1 1.2.4 1 1.2.5
Distributed Lag Models The Koyck Model Dynamic or Autoregressive Models A More General Dynamic Model Jorgenson's Rational Lag Model

1 1.3 Economic Theory and Models with Lags
1 1.3.1 The Partial Adjustment Model 1 1.3.2 The Adaptive Expectations Model

1 1.4 Interpretation of Coefficients

1 1.5 Estimation and Inference 1 1.6 1 1.7 1 1.8 1 1.9 Let Us Sum Up Key Words Some Useful Books Answers/Hints to Check Your Progress Exercises

11.0 OBJECTIVES
After going through this Unit you should be in a position to: state the reasons for constructing models with lagged variables; explain distributed lag models and the Koyck model; explain dynamic or autoregressive models; differentiate between distributed lag and dynamic models; explain the partial adjustment and adaptive expectations models; describe how all the different models discussed so far have similar structures; and describe briefly how to estimate consistently dynamic and distributed lag models.

1 1.1 INTRODUCTION
The responses of economic agents, such as consumers or producers, to changes in the economic environment resulting, for example, from a b p s in prices or incomes, are not instantaneous. The responses (and the cbanges causing them) are usually distributed over time. Equilibrium is t?ot guaranteed (recall the basic cobweb model) and movement towards it is g r d ~ ~ ~ , i . iage in the transmission and the Tima reception of information slow the responses of economic agents. In addition, adjustments entail costs which are likely to be positively related to the speed and m a o n i t i ~ d ~ the ~ d i l l ~ t m m n A ~ nf ~ t ~

Extensions of Regression Models

For example, consider a firm's decision to invest in