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1 a) What is meant by marginalisation and conditioning in the process of model reduction within the dynamic modelling tradition? (30%) b) Having derived a

1 a) What is meant by marginalisation and conditioning in the process of model reduction within the dynamic modelling tradition? (30%) b) Having derived a model for the exchange rate st as a function of the interest rate differential rt and performed the following regression. st= a + b rt + et Where et is an error term. How would you check for the presence of serial correlation in the error term and how would you deal with it. (30%) c) Explain what recursive estimation is and how it would be used to assess the stability of this equation. (40%)

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