Question: 14.1 Suppose that the idiosyncratic errors in (14.4), {uit: t 1,2, , T}, are serially uncorrelated with constant variance, u 2. Show that the

14.1 Suppose that the idiosyncratic errors in (14.4), {uit: t 1,2, …, T}, are serially uncorrelated with constant variance, u 2. Show that the correlation between adjacent differences, uit and ui,t1, is .5. Therefore, under the ideal FE assumptions, first differencing induces negative serial correlation of a known value.

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