Problem

Suppose that the idiosyncratic errors in (14.4), {uit: t = 1, 2,...,T}, are serially uncor...

Suppose that the idiosyncratic errors in (14.4), {uit: t = 1, 2,...,T}, are serially uncorrelated with constant variance, σ2u. Show that the correlation between adjacent differences, △uit and △ui,t+1, is -.5. Therefore, under the ideal FE assumptions, first differencing induces negative serial correlation of a known value.

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Solutions For Problems in Chapter 14