Assignment #5

PPol 604

Due: Thursday, 14 February 2013

Type up your answers. Give proper credit to those you work with and/or the text(s).

Solve the following problems. Show all of your work, but keep your answers concise. Highlight your (final) answer to distinguish it from your other numbers and text. Include a copy of your input (e.g. do file) or output (e.g. log file), when it is an appropriate way to show your work. However, do not include unnecessary output (i.e. no data dumps), and format any output so that it is easily readable. An appropriate time to include output is when you put your results in a table--if your results are wrong, then the grader has no idea how you came to your conclusions (i.e. give partial credit) unless you provide some output. Explanation includes statistical and substantive explanation (explain so that a statistical layperson can understand it, and so that a statistical analyst will see your erudition).

1. {25} Do Problem E15.1 in Stock and Watson. Add the following parts:
   • g. See if there is any remaining autocorrelation in the residuals by running a Breusch-Godfrey test. (You will have to first run a regular regression on the model.) If there is autocorrelation, add an autoregressive term, run the updated model, and check for remaining autocorrelation. Continue adding autogressive lags until there is no longer any (statistically significant) autocorrelation remaining. How many lags did you add? What (if anything) changed in the model? Interpret the autoregressive terms, if you included them.
   • h. Estimate the 18-month cumulative multiplier for the autoregressive model. Compare its magnitude and 95% CI to the model in part e.
2. {10} Do Problem E16.1 in Stock and Watson.
3. {20} [from Gujarati 1995] Quarterly macroeconomic data for the United States is found here. Consider how personal consumption expenditure (PCE, in billions of 1987 dollars) is affected by personal disposable income (PDI, billions of 1987 dollars). Use all of the data.
   a. Look at the time series graphs of PCE and PDI. Would you expect this regression to suffer from the spurious regression phenomenon? Why? Check for unit roots using ADF tests. Decide whether to include a trend in the tests from the graphs, and decide how many lags to include in each test from AIC/BIC.
   b. Are PCE and PDI cointegrated? If, after testing, you find that they are cointegrated, would your answer in (a) change?
   c. Use a simple error correction model, regressing ΔPCE on ΔPDI and the lagged error correction term. (You do not need to include any lags of ΔPCE or ΔPDI. Check to see if this is a good specification of the model using AIC/BIC.) Interpret the short- and long-run behavior of expenditure in relation to income.
4. {10} Do Problem E16.5 in Stock and Watson.
5. {35} Research Project Data Summary:
   Turn in a one-page, double-spaced document (standard font and margins) that offers details about the data set that you have obtained. Briefly review (or update) the research question you will address, and your dependent variable and independent variables. The summary should include summary statistics and any relevant figures that help describe the data. (Figures and tables do not count toward the page limit.)

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