Error Correction Model

An Error Correction Model (ECM) is a statistical tool used to analyze the relationship between related time series data that tend to move together over the long term. It detects deviations from this equilibrium and models how short-term discrepancies are corrected over time to restore balance. Essentially, it explains how quickly and in what manner variables adjust back toward their stable relationship after temporary shocks. ECM is valuable for understanding both long-term trends and short-term dynamics simultaneously, providing insights into how interconnected variables influence each other's movements.