onsider the following model:
Yt = β1 + β2 Xt + β3 Xt-1 + β4 Xt-2 + β5 Xt-3 + β6 Xt-4 + ut
where Y = consumption, X = income, and t = time. The preceding model postulates that consumption expenditure at time t is a function not only of income at time t but also of income through previous periods. Thus, consumption expenditure in the ?rst quarter of 2000 is a function of in- come in that quarter and the four quarters of 1999. Such models are called distributed lag models, and we shall discuss them in a later chapter.
a. Would you expect multicollinearity in such models and why?
b. If collinearity is expected, how would you resolve the problem?