Question

Please can you explain that what do “non-stationary error term”imply in modeling the relationship between economic variables? Clarify explain with an economic example.

Answer 1

Ans.

Non-stationary error term imply that in the modeling the relationship between economic variables, there are several variables that can not be forecasted or modeled or they are not stationary in nature.
For eg. While forecasting for the GDP , exchange rate , inflation , unemployment etc., there are many variables which can be non stationary in nature.
Calculation of the trends for example is an example of the modelling of non stationary error term.

If we use the non-stationary variables in the time series data we may get the data that is unreliable or will be something we can not take decisions. They need to be normalized before we can take the decisions or see the real impact of the economic variables.