Econ 4340 Homework 5: Analyzing the Investment Function using Given Data, Assignments of Introduction to Econometrics

Download Econ 4340 Homework 5: Analyzing the Investment Function using Given Data and more Assignments Introduction to Econometrics in PDF only on Docsity! Homework #5 Econ 4340 Fall 2005 Name_______________________________________ Instructions: Answer the questions given below on lined sheets of paper (or they may be typed) and provide all the necessary printouts of information needed to support your answers. Staple your papers together! Be neat so it can be read!! Consider the Investment Function It = β0 + β1Yt + β2Rt + et where It = Investment in year t Yt = GNP in year t Rt = interest rate in year t Thirty annual observations on I, Y, and R are given in the file “investment.wf1.” Use these data to answer the following questions: 1. Find least squares estimates of β0, β1, and β2 and report the results in the usual way. Comment on the implied statistical reliability of the results. Do the estimates for β1 and β2 have the expected signs (think!). 2. Plot the least squares residual. Do they suggest the existence of autocorrelation? Why or why not? 3. Use the Durbin-Watson test to test for positive first-order autocorrelation. 4. Re-estimate the model after correcting for autocorrelation using the Cochrane- Orcutt method (transform the data only once). Report the results. Note any differences between these results and those obtained in part 1. Discuss how the results in part 1 can be misleading. 5. Re-estimate the model using the AR(1) procedure in Eviews. Comment on the results here compared to the results from part 4. 6. Predict next year’s level of investment given that next year’s values for Y and R are Y = 36 and R = 14 using the results from part 5.