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Re: st: first-difference regression

From   Sami Alameen <>
Subject   Re: st: first-difference regression
Date   Wed, 28 Sep 2011 00:05:04 +0300

It's, I guess, a matter of of what we believe about the data: if the
data is very long (t is large) and we believe the independent variable
is constant, on average, over time (the sum of its differences over
time should be zero) then not including a constant is ok.

but usually the mean change in the independent variable is not zero
especially in short panels (short t), then the constant measures the
average of changes in the independent variable and a constant should
be included.

I don't know of a theoretical justification of which, but this piece
of information is the usual practical justification.

If we believe that the unemployment rate is 6 (the hypothesized
natural rate), then if the difference in the unemployment rate is the
independent variable, the expected value is zero, thus no constant.

However, in advanced economies, in normal times, the expected and
targeted inflation rate is 2% for example, then a constant is needed.
(assuming a continuously updated chain price index for example)
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