University of Illinois

econ_475_120251_244434 Problem Set 4

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Consider the following time-series process yt=1.1yt−1−0.3yt−2+εt where εt∼WN(0,1). We observe that yT=1.1, yT−1=1.4 and εT=−0.1. What is the 2−step ahead optimal forecast of yt?

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