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Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge
Edition 6ISBN: 130527010XIntroductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge
Edition 6ISBN: 130527010XA partial adjustment model is
where yt* is the desired or optimal level of y, and yt is the actual (observed) level. For example, yt* is the desired growth in firm inventories, and xt is growth in firm sales. The parameter ?1 measures the effect of xt on yt*. The second equation describes how the actual y adjusts depending on the relationship between the desired y in time t and the actual y in time t - 1. The parameter ? measures the speed of adjustment and satisfies 0 ? ? ? 1.
(i) Plug the first equation for yt* into the second equation and show that we can write
In particular, find the ?j in terms of the ?j and ? and find ut in terms of et and at.
Therefore, the partial adjustment model leads to a model with a lagged dependent variable and a contemporaneous x.
Verified
Step 1 of 4
(i)
Consider 
is the desired level of 
and
is the actual level of
.
Plug in
in the following equation
The result is as follows:
Step 2 of 4
Step 3 of 4
Step 4 of 4
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