Some farmers were interested in predicting inches of growth of corn as a function of rainfall on a monthly basis, so they collected data from the growing season and estimated an equation of the following form:
Gt = β0 + β1Rt + β2Gt-1 + εt
Where:
Gt = inches of growth of corn in month t
Rt = inches of rain in month t
εt = a normally distributed classical error term
The farmers expected a negative sign for β2 (they felt that since corn can only grow so much, if it grows a lot in one month, it won’t grow much in the next month), but they got a positive estimate instead. What suggestions would you have for this problem?
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