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Does first differencing reduce autocorrelation? Consider the models yt = β xt +εt, where εt = ρεt−1 + ut and εt = ut − λut−1. Compare the autocorrelation of εt in the original model with that of vt in yt − yt−1 = β (xt − xt−1) + vt, where vt = εt − εt − 1. |
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