The present application concerns the relation between per capita consumption (LogConsumption), per capita income



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Problem 2


Consider the autoregressive process defined by the equations:
(4)

(5)

with initial values and where are independent white noise random variables.
Question 2.1

Show that the solution for is given by:
(6)

(7)
Question 2.2

Verify that these solutions for satisfy equations (4) and (5).
Question 2.3

Is a co-integrating relation? Discuss.



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