error specification of OLS regression models

Consider the following regression equation * $$$$\label{eq:1} C_{t} = \beta_{1} + \lambda C_{t-1} + \epsilon_{t}$$$$ and let $$$$\label{eq:3} \epsilon_{t} = \rho\epsilon_{t-1} + u_{t}$$$$ where the error component $$$$u_{t}$$$$ is iid with mean 0 and constant variance, and $$$$\label{eq:4} E(u_{t}\mid C_{t-1},\epsilon_{t-1}) = 0$$$$ Is the OLS estimator of the coefficients in (*) unbiased and consistent under this error specification? Why?

By the definition of OLS estimator we can rewrite the $$\hat\lambda$$ as
$$\hat\lambda=argmin \sum_{i=1}^{n}\epsilon_t^2$$
From first order condition, we get $$\hat\lambda=\frac{\sum_{i}^{n}(C_{t-1}-\bar{C}_{t-1})(C_t-\bar{C_t} )}{\sum_{i}^{n}(C_{t-1}-\bar{C}_{t-1})^2}$$
You can get more simple expression as $$\hat\lambda=\lambda+\frac{\sum_{i}^{n}(C_{t-1}-\bar{C}_{t-1})(\epsilon_t-\bar{\epsilon_t})}{\sum_{i}^{n}(C_{t-1}-\bar{C}_{t-1})^2}$$
Since $$E[(C_{t-1}-\bar{C}_{t-1})(\epsilon_t-\bar{\epsilon_t})]=0$$, $$E(\hat\lambda)=\lambda$$.(unbiased)

Now apply Law of Large Numbers to show consistency.

$$\hat\lambda =\frac{\sum_{i}^{n}(C_{t-1}-\bar{C}_{t-1})(C_t-\bar{C_t} )}{\sum_{i}^{n}(C_{t-1}-\bar{C}_{t-1})^2}=\frac{1/n\sum_{i}^{n}(C_{t-1}-\bar{C}_{t-1})(C_t-\bar{C_t} )}{1/n\sum_{i}^{n}(C_{t-1}-\bar{C}_{t-1})^2}$$
By LLN, $$\hat\lambda =\frac{Cov(C_t, C_t-1)}{Var(C_t-1)}=\frac{Cov(\beta_1 +\lambda C_t-1 +\epsilon_t, C_t-1)}{Var(C_t-1)}=\frac{\lambda Var(C_t-1)+Cov(\epsilon_t, C_t-1)}{Var(C_t-1)}=\lambda$$.(consistent)

• what does lln mean? Apr 22, 2022 at 4:29
• @JohnWilliams LLN means Law of Large Numbers Apr 22, 2022 at 4:37
• could you explain why its unbiased and consistent with more words? Apr 22, 2022 at 4:47
• @JohnWilliams I edited my solution. You need to know the concept of LLN to prove consistency. Apr 22, 2022 at 5:14
• The AR(1) is not unbiased for the lagged coefficient even in the case where the error term is purely iid. See this link for a couple of different and insightful explanations. The link doesn't cover whether it's consistent for the AR(1) error term case but I don't think it is. stats.stackexchange.com/questions/240383/… Apr 25, 2022 at 15:53