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Explain how to estimate the parameters of the following model: yt = α + βxt + γ yt−1 + δyt−2 + et, et = ρet−1 + ut. Is there any problem with ordinary least squares? Let yt be consumption and let xt be disposable income. Using the method you have described, fit the previous model to the data in Appendix Table F5.1. Report your results. |
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