Suppose yao + a₁yt-1 + ut, and u₁ = put-1 + et and et is serially uncorrelated with eswhere st.(a)Show that thecontemporaneousexogeneity assumption does not hold(b)Show that theproblem in (a) is solved when yt-2 is included in the model

The objective of the question is to demonstrate that the contemporaneous exogeneity assumption does…

Answered: Suppose yao + a₁yt-1 + ut, and u₁ =…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose yao + a₁yt-1 + ut, and u₁ = put-1 + et and et is serially uncorrelated with es where st. (a) Show that the contemporaneous exogeneity assumption does not hold (b) Show that the problem in (a) is solved when yt-2 is included in the model