The theory of difference equations

The theory of difference equations underlies all of the time-series methods employed inlater chapters of this text. It is fair to say that time-series econometrics is concerned withthe estimation of difference equations containing stochastic components. The traditionaluse of time-series analysis was to forecast the time path of a variable. Uncoveringthe dynamic path of a series improves forecasts since the predictable components of theseries can be extrapolated into the future. The growing interest in economic dynamicshas given a new emphasis to time-series econometrics. Stochastic difference equationsarise quite naturally from dynamic economic models. Appropriately estimated equationscan be used for the interpretation of economic data and for hypothesis testing.