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Autoregressive Distributed Lag Model (ARDL p, q model)

Econometric analysis of long-run relations has been the focus of much theoretical and empirical
research in economics. In the case where the variables in the long-run relation of interest are
trend stationary, the general practice has been to de-trend the series and to model the de-trended
series as stationary distributed lag or autoregressive distributed lag (ARDL) models. Estimation
and inference concerning the long-run properties of the model are then carried out using standard
asymptotic normal theory. The analysis becomes more complicated when the variables are
dierence-stationary, or integrated of order 1 (I(1) for short). The recent literature on
Cointegration is concerned with the analysis of the long run relations between I(1) variables, and
its basic premise is, at least implicitly, that in the presence of I(1) variables the traditional ARDL
approach is no longer applicable. Consequently, a large number of alternative estimation and
hypothesis testing procedures have been specially developed for the analysis of I(1) variables.

Steps:
ARDL model have the following steps;

Step 1;
Apply unit root determine the order of Cointegration of the variables

Step 2;
Determine the appropriate lag length criteria for each variable. Level of lags is equal
to 4 for each variable as EG we have one dependent variable in the model

Step 3;
To run the regression equation for those model having the short run and long run
relationship,

LMt= 0 + Lmt-1 + 2it-1 + 3 Lyt-1+ 4 Lpt-1 +


2

iit-i+
i=0
1)
2)
3)
4)

iLyt-i+
i=0

i=1

i=0

Lpt-i

I =1.4
I=0.P2(4)
I=0.P3(4)
I=0.P4(4)

After estimating the equation apply Wald-Coefficient restriction 1=2=3=4=0

LMt-1+

Step 4;
Apply F-test
H0; 1=2=3=4=0 (No Cointegration)
H1; 1=2=3=40 (Cointegration)
1) If F-calculated is < F-Tabulated (if F-Calculated is below the lower critical value) then
reject H1
2) If F>F* (if F-Calculated is above the upper critical value) then reject H0
3) If FL*< F < Fu* then inconclusive.

Step 5;
Normalize the long-run elasticities. Divide long-run elasticities with 1 then we have\
=

mt-1 + 2/1it-1 +3/1Lyt-1 + 4/1Lpt-1