I am trying to estimate a multivariate linear regression model in the form of:
$Y(t) = c + b_1*X_1(t) + b_2*X_2(t) + b_3*X_3(t) + b_4*X_4(t)$
All my variables (both Xs and Y) are Year on Year changes of economic data measured Quarterly (Frequency = Quarterly).
When I run the regressions, my model suffers from Autocorrelation. This is logical if we think that between 2 consecutive quarters of yearly changes there is an overlap of 3 quarters.
Now, my question is. Would it be acceptable to introduce a lagged version of the dependent variable in my regression? i.e. estimate a model in the form of:
$Y(t) = c + k*Y(t-1) + b_1*X_1(t) + b_2*X_2(t) + b_3*X_3(t) + b_4*X_4(t)$
When I do that, there is not an Autocorrelation problem anymore. I would like though to make sure that this does not create any other problem that I can't imagine.
Thanks a lot in advance.