. 16.

(a) BecauseR1tfollowsarandomwalk(R1tR1t1ut),theiperiodaheadforecastofR1tis
R1t i|t R1t i 1|t R1t i 2|t L L R1t .
Thus
1 k 1 k
Rkt
k i 1
R1t i|t et R1t et R1t et .
k i 1

(b) R1tfollowsarandomwalkandisI(1).RktisalsoI(1).GiventhatbothRktandR1tare
integratedoforderone,andRktR1tetisintegratedoforderzero,wecanconcludethat

RktandR1tarecointegrated.Thecointegratingcoefficientis1.
R1t 0.5 ut , R1t
(c) When isstationarybutR1tisnotstationary.
R1t 1.5R1t 1 0.5R1t 2 ut ,
anAR(2)processwithaunitautoregressiveroot.Thatis,
I (1) R1t
R1tis .Theiperiodaheadforecastof is
R1t i|t 0.5R1t i 1|t 0.52 R1t i 2|t L L 0.5i R1t .

TheiperiodaheadforecastofR1tis
R1t i t R1t i 1|t R1t i|t
R1t i 2|t R1t i 1|t R1t i|t
K K
R1t R1t 1|t L R1t i|t
R1t (0.5 L 0.5i ) R1t
0.5(1 0.5i )
R1t R1t .
1 0.5

Thus
1 k 1 k
Rkt
k i 1
R1t i t et [ R1t (1 0.5i )R1t ] et
k i 1
R1t R1t et .

1k ik1 (1 0.5i ). Rkt R1t R1t et .

where Thus ThusRktandR1tarecointegrated.
Thecointegratingcoefficientis1.
(d) WhenR1t0.5R1t1ut,R1tisstationaryanddoesnothaveastochastictrend.
R1t i|t 0.5i R1t , Rkt R1t et , 1k ik1 0.5i.
sothat, where SinceR1tandetareI(0),
thenRktisI(0).
16.6. (a) Rewritetheregressionas
Yt3.02.3Xt1.7(Xt+1Xt)0.2(XtXt1)ut
Thus2.3,11.7,00.2and10.0.
(b) CointegrationrequiresXttobeI(1)anduttobeI(0).
(i) No
(ii) No
(iii) Yes