Question: Consider the simple linear regression model y t = 0 + 1x + t , where the error are generated by the second - order

Consider the simple linear regression model y t = β0 + β1x + εt , where the error are generated by the second - order autoregressive process

ε ρε ρε t t tt =++ 11 22 − − a Discuss how the Cochrane – Orcutt iterative procedure could be used in this situation. What transformations would be used on the variable y t and x t ?

How would you estimate the parameters ρ1 and ρ2 ?

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