Hello, I have some conceptual econometrics questions on the use of interactoin terms.
I have the following time series regression: logdiff(y) = logdiff(r) + logdiff(m) (eq 1),
where all variables are stationary. But in their raw form y, r and m are not stationary. But taking a log and first differencing each variable makes them stationary.
I have 3 questions:
1) If I want to know see if m and r interact significantly, do I just create a new variable (let's say) r_times_m and let it equal to rXm and re-run the regression as the following?
logdiff(y) = logdiff(r) + logdiff(m) + r_times_m ( eq 2)
2) If I run the above model (eq 2), r_times_m won't be stationary, so would that still be a valid regression for interpretation?
3) Or should I create a a new variables logdiff_r_times_logdiff_m and let it equal to logdiff(r)Xlogdiff(m), then run the following regression?
logdiff(y) = logdiff(r) + logdiff(m) + logdiff_r_times_logdiff_m ( eq 3)
Thanks in advance!
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