Hiya, I was wondering if anyone could explain to me where the examiners got the initial conditions of k(0) and h(0), as well as how it all fits in with the question. I'm just not sure where to start with this one. Thanks!
Look at the definition of h(0), say. h(0)=2p1(0)-p2(0) pi(0) is the prob that the economy is in state i at time 0. Since we're told the economy is in state 2 at time 0, we must have: p1(0)=0 and p2(0)=1 This gives h(0)=-1. The same method is used to get k(0)
