ECO 365 University of Michigan Introduction to Econometrics Problems

Problem 1: Nonstationarity—the Basics

1a. Dene stationarity. Note: You can dene it using math or words (or both).

1b. If our disturbance term follows a random walk, i.e., then it’s variance is . Explain how this expression of its variance shows that the disturbance is nonstationary (i.e., it violates stationarity).

1c. We previously discussed autocorrelated distrubances, e.g., an AR(1) process such that Under which circumstances would this AR(1) process become a random walk

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