Question

Question 4 The following regressions are based on the CPI data for the United States for the period 1960-1999, for a total of 40 annual observations: 1.ACPI,0.0372CPI,- I = (9.6427) R2 0.0304 d 0.5259 RSS 203.6222 1=(2.5000) (2.7583) R2-0.1705 d 0.6030 RSS 174.1966 3. ΔCPI, = 1.8790 + 0.57061-0.1158CPI,-! 1=(3.1460) (4.2576) (-3.5443) R, =0.4483 d=0.7969 RSS = 115.8579 where RSS residual sum of squares. a. Examining the preceding regressions, what can you say about sta- tionarity of the CPI time series? b. How would you choose among the three models? c. Equation (1) is Eq. (3) minus the intercept and trend. Which test would you use to decide if the implied restrictions of model 1 are valid? (Hint: Use the Dickey-Fuller and F tests. Use the approximate

Answer 1

a. The CPI time series stationarity improves as we move from the first to the 3rd regression equation. This is because the R square value increases which indicates better data set

b. The 3rd model will be chosen because it has highest R square and that explains that the data set is comparatively better consistent