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Thread: Find the steady-value of r_t

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    Find the steady-value of r_t



    You estimate the following model:
    rt=1.5+1.3rt-1-0.6rt-2+et
    var(et)=0.16


    a) Find the steady-value of rt.

    My answer is based on the formula for the steady-state (long-run) growth rate:

    rL=b_0+b1 rL+...+bk rL
    so that
    rL=b0/(1-b1-b2-...bk)

    rL=1.5/(1-1.3+0.6)=5

    What should I do with
    et and var(et)=0.16?

    Thank you.

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    Re: Find the steady-value of r_t


    I am not sure about the word "steady-value" here.
    But I assume it is the long run time average of the time series \lim_{n\to+\infty}\frac {1} {n} \sum_{t=1}^{n}r_t

    For an ergodic time series, it will converge to r_L = E[r_t]

    Note the white noise process satisfy E[e_t] = 0, and by the stationarity
    we have E[r_t] = r_L \forall t

    Taking expectation on both sides, rearranging terms will yield the desired equation.

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