You are presented with the following time series model: Y = X3 +u, where Y is...

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You are presented with the following time series model: Y = X3 +u, where Y is a n x 1 vector, u is is a n x 1 vector, X is a nx q matrix and 3 is a q x 1 column vector. (a) What assumptions do we need to make about the error vector, u in order for us to be sure that the Ordinary Least Squares estimator of 3 is BLUE? [8 MARKS] (b) What does it mean for the above model if we know that one of the variables in our model is endogenous? [6 MARKS] (c) Explain when, and how, we might be able to use an Instrumental Variable to over- come the problems caused by the inclusion of an endogenous variable in the model presented above. [11 MARKS] You are presented with the following time series model: Y = X3 +u, where Y is a n x 1 vector, u is is a n x 1 vector, X is a nx q matrix and 3 is a q x 1 column vector. (a) What assumptions do we need to make about the error vector, u in order for us to be sure that the Ordinary Least Squares estimator of 3 is BLUE? [8 MARKS] (b) What does it mean for the above model if we know that one of the variables in our model is endogenous? [6 MARKS] (c) Explain when, and how, we might be able to use an Instrumental Variable to over- come the problems caused by the inclusion of an endogenous variable in the model presented above. [11 MARKS]

Answer rating: 100% (QA)

a In order for the Ordinary Least Squares estimator of to be BLUE Best Linear Unbiased Estimator we ... View the full answer