EC355 Lecture 3: assignment 2 answers.pdf
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Problem set solution: (a) we are trying to transform the model so that we have well behaved error term t. Lag one period and multiply by 1 gives. Yt = 1 + 2x2t + ut (1) 1yt 1 = 1 1 + 1 2x2t 1 + 1ut 1 (2) Lag two period from (1) and multiply by 2 gives. 2yt 2 = 2 1 + 2 2x2t 2 + 2ut 2 (3) Lag three period from (1) and multiply by 3 gives. 3yt 3 = 3 1 + 3 2x2t 3 + 3ut 3 (4) 1 + 2x t + t (b) exactly the same except the transformed model will have one more inde- pendent variable which looks like. Yt 1yt 1 2yt 2 3yt 3 = (1 1 2 3) 1 + 2(x2t 1x2t 1 2x2t 2 3x2t 3) + +ut 1ut 1 2ut 2: basically the . E( : = 2 + 3.
