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14.1. (a) Since the probability distribution of Yt is the same as the probability distribution
of Yt1 (this is the definition of stationarity), the means (and all other moments)
are the same.
(b) E(Yt) 0 1E(Yt1) E(ut), but E(ut) 0 and E(Yt) E(Yt1). Thus E(Yt)
0 1E(Yt), and solving for E(Yt) yields the result.
14.3. (a) To test for a stochastic trend (unit root) in ln(IP), the ADF statistic is the t-
statistic testing the hypothesis that the coefficient on ln(IPt 1) is zero versus the
alternative hypothesis that the coefficient on ln(IPt 1) is less than zero. The
calculated t-statistic is t 0.0085
0.0044
1.93. From Table 14.4, the 10% critical value
with a time trend is 3.12. Because 1.93 3.12, the test does not reject the
null hypothesis that ln(IP) has a unit autoregressive root at the 10% significance
level. That is, the test does not reject the null hypothesis that ln(IP) contains a
stochastic trend, against the alternative that it is stationary.
(b) The ADF test supports the specification used in Exercise 14.2. The use of first
differences in Exercise 14.2 eliminates random walk trend in ln(IP).
14.5. (a)
(b) Using the result in part (a), the conditional mean squared error
with the conditional variance t2|t 1 E[(Yt Yt|t 1 ) 2 ]. This equation is minimized
when the second term equals zero, or when ft 1 Yt|t 1. (An alternative is to use
the hint, and notice that the result follows immediately from exercise 2.27.)
a function of Yt 1 and its lagged values. The assumption E (ut |Yt 1 , Yt 2 ,...) 0
means that conditional on Yt 1 and its lagged values, or any functions of Yt 1
and its lagged values, ut has mean zero. That is,
Thus ut and ut 1 are uncorrelated. A similar argument shows that ut and ut j are
uncorrelated for all j 1. Thus ut is serially uncorrelated.
14.7. (a) From Exercise (14.1) E(Yt) 2.5 0.7E(Yt 1) E(ut), but E(Yt) E(Yt 1)
(stationarity) and E(ut) 0, so that E(Yt) 2.5/(1 0.7).
cov(Yt , Yt 1 ) 0.7 Y2
corr (Yt , Yt 1 ) 0.7.
var(Yt ) var(Yt 1 ) Y2
cov(Yt , Yt 2 ) 0.7 2 Y2
corr (Yt , Yt 2 ) 0.49.
var(Yt ) var(Yt 2 ) Y2
14.9. (a) E(Yt) 0 E(et) b1E(et1) bqE(etq) 0 [because E(et) 0 for all
values of t].
(b)
where the final equality follows from var(et) e2 for all t and cov(et, ei) 0 for i
t.