Which of the following assumptions is needed for the usual standard errors to be valid when differencing with more than two time periods? A)The regression model exhibits heteroskedasticty. B)The differenced idiosyncratic error or u_it is uncorrelated over time. C) The unobserved factors affecting the dependent variable are time-constant. D) The regression model includes a lagged independent variable.

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Quizplus · Accepted Answer

The assumption that the differenced idiosyncratic error is uncorrelated over time is needed for the usual standard errors to be valid when differencing with more than two time periods. This is because if the errors are correlated over time, then the standard errors would be biased and inconsistent, leading to incorrect inference. The other options do not address this specific assumption. The differenced idiosyncratic error is uncorrelated over time.

Which of the Following Assumptions Is Needed for the Usual