Relationship between interest rates and retail sales. I have a time series sample of quarterly data for 10 years. My dependent variable is retail prices and independent variables are interest rates, wages, population, inflation, disposable income and consumer confidence index. The Durbin-Watson is 0.97. How do I deal with the autocorrelation?
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Auto-correlation in the residuals can be masked/suppressed by Pulses/Seasonal Pulses or the resultant of omitted Level/Step shifts or Local Time Trends. Auto-correlation in the residuals may be the result of parameters changing over time. Auto-correlation in the residuals may be the result of omitted (important) lag structures in the user specified cause variables. Auto-correlation in the residuals may be the result of an omitted (lurking) cause variable either stochastic or deterministic. Correct strategies to deal with auto-correlation depend on finding/detecting which of the above is relevant. Simple approaches assuming the nature of the problem/opportunity often miss the boat.
