A distributed lag model is used to examine the impact of a variable over time, allowing for a delayed effect.

Get the full solved assignment PDF of MECE-001 of 2023-24 session now.

It involves specifying how the effect of an independent variable persists over several time periods. The model can be represented as follows:

[ Y_t = \beta_0 + \beta_1X_{t} + \beta_2X_{t-1} + \beta_3X_{t-2} + \ldots + \varepsilon_t ]

Here, ( Y_t ) is the dependent variable at time ( t ), ( X_t ) is the independent variable at time ( t ), and ( \beta_1, \beta_2, \beta_3, \ldots ) are coefficients representing the impact of the independent variable at different time lags.

To estimate the model:

Choose the Lag Length: Decide the number of lag periods to include based on the theoretical or empirical understanding of the relationship.
Estimation Method: Common methods include Ordinary Least Squares (OLS) or specialized techniques like autoregressive distributed lag (ARDL) models.
Interpretation: Interpretation of coefficients involves understanding the cumulative effect of the variable over time. For example, ( \beta_1 ) represents the immediate impact, ( \beta_2 ) the impact after one period, and so on.
Test for Significance: Assess the significance of coefficients and lags. Statistical tests help determine whether the lagged terms significantly contribute to explaining the variation in the dependent variable.
Model Diagnostics: Check for model assumptions, such as homoscedasticity and normality of residuals.
Forecasting: Once the model is estimated and validated, it can be used for forecasting future values of the dependent variable.

Distributed lag models are particularly useful when investigating time delays in the impact of an independent variable on the dependent variable, such as in economic or epidemiological studies.