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Optimal Inference in Regression Models with Nearly Integrated Regressors

Econometrica 2006 74(3), 681-714
This paper considers the problem of conducting inference on the regression coefficient in a bivariate regression model with a highly persistent regressor. Gaussian asymptotic power envelopes are obtained for a class of testing procedures that satisfy a conditionality restriction. In addition, the paper proposes testing procedures that attain these power envelopes whether or not the innovations of the regression model are normally distributed.