Question

9. If the variables log Investment and log G model as log levels (In Investment and in vestment and log GDP have unit root do you use them vestment growth that is, dlag GDP and dog cavestmen estment and In GDP Birtle difference (GDP growth 10. What two famous tests do you use wwo famous tests do you use to test for dincar cointegration among the time series variables that are I 7 Do you run the tests the variables which all have unit roots ((1))? " that are I(1)? Do you run the tests in the levels or the first difference of 1. What model do you use to check and estimate long run relations (cointegration) when variables have mixed orders of integration. Le... 1(1) and I(0) but not 1(2). 12. What test do you use to check for long run relation (cointegration) in the model questioned in item (11)? 13. How do you specify the variables in the short run and the long run in the model implied by item (11)? That is, how do you enter those variables in the equations of the model identified in question (11)?

Answer 1

9). If a variable has a unit root then this implies that the variable is non Stationary and hence we cannot use that particular variable in our analysis. Since both the variables i.e log Gdp and log Investment have unit root it means that they both are non stationary and we cannot use them in our analysis.

Now to make a non stationary variable stationary we take their first difference i.e we create a new variable which can be written as Y_{^{​​​​​​}t}=X_t - X_t-1​​​​​​ . Once the variable becomes stationary we can use it in our analysis.

If the variable does not become stationary after first difference we take the second difference that is we once again create a new variable which can be written as

Z_t=Y_t-Y_t-1 . Where Y_t= X_t-X_t-1 and Y_t-1 = X_t-1 - X_t-2 .

And if the variable doesn't become stationary even after second difference we take the third difference and so on and so forth.

Generally the variable become stationary after first difference.

So if log GDP and log investment are stationary in their first difference we will use dlog(GDP) and dlog(investment) in our analysis.