Suppose both X and Y are I(1) variables which are generated by the following true system

Xt=a+bYt+et

Yt=Yt-1+vt

Where e and v are stationary error processes.

a) Define the common stochastic trend underlying this model (20%)

b) What is the cointegrating vector(20%)

c) Explain the relationship between the number of cointegrating vectors in a system and the number of stochastic trends.(20%)

d) What is the importance of the Granger Representation theorem to practical modelling?(40%)

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