We want to estimate the coefficient k in the Permanent IncomeHypothesisCį = kY;*, 0 < k<1where C; is the consumption and Y* is the permanent income.However, we do not observe the permanent income. Instead, wecan only use a proxy variable Y₁;, which is contaminated by aclassical measurement error (i.e., Y; Y;* + e; and e; is theclassical measurement error). Then the OLS estimator of k obtainedby regressing C on Y and a constant isbiased downwardbiased toward zerobiased upwardunbiased-

The reason is that the OLS estimate of k is biased upward if the error term, e, is correlated with…

Answered: We want to estimate the coefficient k…

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We want to estimate the coefficient k in the Permanent Income Hypothesis C₁ = kY,0

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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