Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 14

In, we wrote the model that explicitly contains the long-run propensity, ?0, as

where we omit the other explanatory variables for simplicity. As always with multiple regression analysis, ?0 should have a ceteris paribus interpretation. Namely, if pet increases by one (dollar) holding (pet-1 - pet) and (pet-2 - pet) fixed, gfrt should change by ?0.

(i) If (pet-1 - pet) and (pet-2 - pet) are held fixed but pet is increasing, what must be true about changes in pet-1 and pet-2?

(ii) How does your answer in part (i) help you to interpret dQ in the above equation as the LRP?

Step 1 of 2

i.

To solve our question that is increasing but , and are constants. It is only possible when all previous values of are same.

Viz.

The values of and are given already, which cannot be altered in the present period. Now, we can calculate the difference between a given values a variable which is increasing.

Now, suppose at time, increased by a amount

Here.will give us a constant value because is the amount of change in

Period is assumed as a discrete change in time.

Two things we have to keep in mind

1.This type of notion quoted in question number 1, is only possible when we are considering time,, , t as adiscrete point in time axis.

2.In this discussion we didn’t considered special properties of parameters such as Theta as a LRP. We just considered the equation as a single independent equation and prove our notion.