In Example 10.4, we wrote the model that explicitly contains the long-run propensity, (0, as
gfrt = a0 + (0pet + (1(pet-1 -pet) + (2(pet t-2 - pet) + ut,
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, gfr, 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 (0 in the above equation as the LRP?