a. What does it mean to describe two economic variables as cointegrated? From your knowledge o economic theory, suggest and plot a possible example of two variables that might be cointegrated.
a. What does it mean to describe two economic variables as cointegrated? From your knowledge o economic theory, suggest and plot a possible example of two variables that might be cointegrated.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:a. What does it mean to describe two economic variables as cointegrated? From your knowledge of
economic theory, suggest and plot a possible example of two variables that might be
cointegrated.
b. Suppose that et is zero mean white noise with var(et) = o. Consider the process:
i.
ii.
iii.
iv.
Y = 1+0.4Y-1 + e - 0.3e-1
0.15et-2
Write the model using lag operator notation.
Assess if the process is covariance stationary.
Identify this model as an ARIMA (p, d, q) process; that is, specify p, d, and q.
Find μ = E(Y).
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