## Adjusting short run equation in VECM

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ceffast
Posts: 1
Joined: Tue Dec 04, 2018 11:49 am

### Adjusting short run equation in VECM

Hi all, EViews noob here.

I have a 4 variable VECM. All of my variables are entered as logs. However, for the short run equations, they are automatically differenced as (Xt - Xt-1). I want to difference them as (Xt - Xt-4), as I have quarterly data and wish to compute year over year change. I am aware of how to create this series in EViews,

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`series Z = log(X) - log(X(-4))`

...however I do not know how to enter it into the VECM so that the model is estimated using my new series.

Any assistance appreciated

EViews Mirza
Posts: 46
Joined: Sat Apr 22, 2017 8:23 pm

### Re: Adjusting short run equation in VECM

The differencing that happens is a byproduct of the theoretical construction. In other words, even if you create a variable

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`series z = x-x(-4)`

and use said series to specify your VECM, you will find that your transitory portion of the VECM will be specified in terms of lagged differences

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`D(z) = z-z(-1) = (x-x(-1)) - (x(-4) - x(-5))`

The only thing I could suggest, if you are really keen on looking at year-on-year changes, is to aggregate your quarterly data to an annual series and then specify the VECM model as you would have done to begin with. In this case, the lagged differences in X that would appear in the VECM regression would be the year-on-year changes.