Consider the Koyck (or, for that matter, the adaptive expectations) model given in Eq. (17.4.7), namely,

Suppose in the original model u_t follows the first-order autoregressive scheme u_t ˆ’ ρu_1ˆ’t = ε_t, where ρ is the coefficient of autocorrelation and where ε_t satisfies all the classical OLS assumptions.

a. If ρ = λ, can the Koyck model be estimated by OLS?

b. Will the estimates thus obtained be unbiased? Consistent? Why or why not?

c. How reasonable is it to assume that ρ = λ?

Transcribed Image Text:

Y-α(1-λ) + β X +λY- + (1- λι-1)