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Statement of a problem № m78139

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Suppose that the idiosyncratic errors in (14.4), {uit: t = 1, 2,....,T}, are serially uncorrelated with constant variance,σit2. Show that the correlation between adjacent differences, Δuit and ΔuI,t+1, is -.5. Therefore, under the ideal FE assumptions, first differencing induces negative serial correlation of a known value.




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