A Dynamic Model for determining Inward Foreign ... - Business School

and error correction model (ECM) are applied to explain the dynamic movement of the
variables in the lagged system.
The quarterly GDP time series data are converted into monthly using Chow and Lin
(1971 372-375) procedure. The idea is that the GDP is observable at the quarterly
frequency, but the indicators used the indicators employed to disaggregate it are observable
at a highest frequency, the data are available on a monthly basis, and are potentially
informative variables.
In order to illustrate the method, is monthly values of one of the GDP components
and n are set of variables available monthly and contain information about .
( )
Where ( ). The monthly error term is ( )with unknown serial correlation
coefficient and V is the error covariance matrix formulated as follows:
[ ]
( )
Taking quarterly averages of equation number (4.50) to obtain the following equation:
( ) or y.=X.β+μ.
Where is the matrix that converts monthly observations to quarterly averages,
where a dot subscript is a quarterly average. ( ) ( ) is the quarterly
error covariance matrix. Finally, the estimated monthly values for the GDP component ̂
are computed by Chow-Lin’s formula as follows:
̂ ̂ ̂ ( ) ̂
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