7. In Example 11.7 (firm investments), does the conclusion that a non-stationary AR1 model is preferred still hold true when permanent random subject effects are added to the model.

Thus

with ui t ∼ N(0, τ
−1) unstructured and bi centred at β1. There are only 10 firms, so a fixed subject effects approach may also be run to assess default assumptions such as bi normal.

Transcribed Image Text:

Yit = b; + B2 Vit-1+ B3Ci.t-1 + it = Eit peit-1+uit,