In Example 10.4, we wrote the model that explicitly contains the long-run propensity, u0, as gfrt 5 a0 1 u0pet 1 d1 1pet21 2 pet 2 1 d2 1pet22 2 pet 2 1 u, where we omit the other explanatory variables for simplicity. As always with multiple regression analysis, u0 should have a ceteris paribus interpretation. Namely, if pet increases by one (dollar) holding 1pet21 2 pet 2 and 1pet22 2 pet 2 fixed, gfrt should change by u0.

(i) If 1pet21 2 pet 2 and 1pet22 2 pet 2 are held fixed but pet is increasing, what must be true about changes in pet21 and pet22?

(ii) How does your answer in part (i) help you to interpret u0 in the above equation as the LRP?

8 In the linear model given in equation (10.8), the explanatory variables xt 5 1xt1, p, xtk 2 are said to be sequentially exogenous (sometimes called weakly exogenous) if E1ut 0xt

, xt21, p, x1 2 5 0, t 5 1, 2, p,