ARDL

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ARDL

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Polynomial DL (PDL)

Pongsa Pornchaiwiseskul

Faculty of Economics

Chulalongkorn University

(c) Pongsa Pornchaiwiseskul, Faculty of Economics,

Chulalongkorn University

Chulalongkorn University

Explanatory variables

current and lagged values of exogenous

variables

Three components

Auto-Regressive part

Distributed-Lag part

random part

Chulalongkorn University

Chulalongkorn University

+ 10 X 1t + 11 X 1,t 1 + ... + 1, p1 X 1,t p1

+ 20 X 2t + 21 X 2,t 1 + ... + 2, p 2 X 2,t p 2

M

+ K 0 X Kt + K 1 X K ,t 1 + ... + K , pK X K ,t pK

+ t

(c) Pongsa Pornchaiwiseskul, Faculty of Economics,

Chulalongkorn University

k0

k1

Chulalongkorn University

Chulalongkorn University

Only one X

error terms could be ARMA

Declining effect over infinite lag or

pk =

Restriction on kj

distributed over pk periods.

k0 = Current or short-run effect of Xk on Y

kj = j-period delayed effect of Xk on Y

k = total or long-run effect of Xk on Y

where = + + ... +

k

uncorrelated with the error term. If the

random part is auto-correlated error terms,

OLS becomes invalid. No problem with

DL models (without AR part).

Without restriction on parameters, there

will be too many parameters (),

especially for very long lag.

k , pk

Chulalongkorn University

Estimation

Step 0 Guess

Step 1 Estimate ( , , ) for

kj

k0

Yt Yt 1 = 0 (1 ) + 0 X t + t t 1

Step 1 until convergence

Lag (j)

(c) Pongsa Pornchaiwiseskul, Faculty of Economics,

Chulalongkorn University

= 0 + 0 X t + 0 X t 1 + 2 0 X t 2 + ... + t

= 0 + 0 (1 + L + 2 L2 + ...) X t + t

= 0 + 0 (1 L) 1 X t + t

(1 L)Yt = 0 (1 ) + 0 X t + (1 L) t

j = 0 + 1 j + 2 j 2 + ... + m j m

Yt Yt 1 = 0 (1 ) + 0 X t + t t 1

Yt = 0 (1 ) + Yt 1 + 0 X t + t t 1

11

Allow more than one X

error terms could be ARMA

polynomial effect over finite lag

Restriction on kj

Yt = 0 + 0 X t + 1 X t 1 + ... + p X t p + t

Chulalongkorn University

Chulalongkorn University

m << p, j = 0,1,..., p

10

Chulalongkorn University

12

Yt = 0 + 0 X t + 1 X t 1 + ... + p X t p + t

Yt = 0 + 0 Z 0t + 1Z1t + 2 Z 2t + ... + m Z mt + t

= 0 + 0 X t

+ ( 0 + 1 + 2 + ... + m ) X t 1

+ ( 0 + 2 1 + 4 2 + ... + 2 m m ) X t 2

+ ( 0 + 3 1 + 9 2 + ... + 3m m ) X t 3

M

+ ( 0 + p 1 + p 2 2 + ... + p m m ) X t p

+t

Chulalongkorn University

13

Yt = 0

Z 0t

+ 0 (X t + X t 1 + ... + X t p )

+ 1 (X t 1 + 2 X t 2 + ... + pX t p )

(

(X

+ 2 X t 1 + 4 X t 2 + ... + p 2 X t p

+3

M

3

+

8

+

...

+

X

p

X t p

t 1

t 2

+t

Chulalongkorn University

15

Case 1 = 0

Restriction

)

)

+ m X t 1 + 2 m X t 2 + ... + p m X t p

Chulalongkorn University

Z mt

)

14

0 1 + 2 + ... + (1) m m = 0

==> Restricted LS is BLUE

(c) Pongsa Pornchaiwiseskul, Faculty of Economics,

Chulalongkorn University

16

Case p +1 = 0

Restriction

0 + ( p + 1) 1 + ( p + 1) 2 2

+ ... + ( p + 1) m m = 0

==> Restricted LS is BLUE

(c) Pongsa Pornchaiwiseskul, Faculty of Economics,

Chulalongkorn University

17

Case 1 = 0, p +1 = 0

Restrictions

0 1 + 2 + ... + (1) m m = 0

0 + ( p + 1) 1 + ( p + 1) 2 2

+ ... + ( p + 1) m m = 0

Effect

starts

from

zero

and

finally

back

to zero. ==> Restricted LS is BLUE

(c) Pongsa Pornchaiwiseskul, Faculty of Economics,

Chulalongkorn University

18

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