Engle-Granger Two-Step Approach

The Engle-Granger Two-Step Approach is a method used in economics to analyze whether two time series variables, like prices or interest rates, have a stable long-term relationship. First, it checks if each variable individually tends to move together over time using a regression. Next, it assesses whether the combination of these variables remains consistent or "co-integrated" in the long run. If they are co-integrated, it suggests they are linked by an equilibrium relationship, which can be useful for forecasting or understanding economic dynamics.