# Error Correction Model

## Error Correction Model

### Error Correction Model

#### The ECM

The ECM does a regression with first differences, and includes lagged error terms.

$$\Delta y_t= \Delta x_t$$
We know that long term $$y_t=\theta x_t$$. We use the error from this in a first difference model.
$$\Delta y_t= \alpha \Delta x_t + \beta (y_{t-1}-\theta x_{t-1})$$