Allama Iqbal Open University, Islamabad

Department of Mathematics and Statistics

Assignment Number - 2
Course Code: 1562 Class: M.Sc(Statistics)
Course: Basic Econometrics Semester: Autumn, 2018

Q no.1:
What are the specification error? Explain Ramsey’s RESET to test the specification error?

Q no.2:

What is meaning of Unit root? and what the test we applied to check this?

Q no.3:

What is meaning of cointegration? Name & Explain the test to check the cointegration in
the model?

Q no.4:

Interpret the regression results ?

The following regressions are based on the CPI data for the United States for the

period 1960–2007, for a total of 48 annual observations:

1.

CPIt = 0.0334CPIt−1

t = (12.37)

R2 = 0.0703 d = 0.3663 RSS = 206.65

2.

CPIt = 1.8662 + 0.0192CPIt−1

t = (3.27) (3.86)

R2 = 0.249 d = 0.4462 RSS = 166.921

3.

CPIt = 1.1611 + 0.5344t − 0.1077CPIt−1

t = (2.37) (4.80) (−4.02)

R2 = 0.507 d = 0.6071 RSS = 109.608

where RSS = residual sum of squares.

a. Examining the preceding regressions, what can you say about stationarity 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 t and F tests. Use the approximate values given in Appendix D,

Table D.7.)

from book page no. 818, chapter number 21 , exercise Q.no 21.27 part a , b, c?

Q no.5:

To assess the effect of the Fed’s policy of deregulating interest rates beginning in July

1979, Sidney Langer, a student of mine, estimated the following model for the quarterly period of
1975–III to 1983–II.†

Yˆ

t = 8.5871 − 0.1328Pt − 0.7102Unt − 0.2389Mt

se = (1.9563) (0.0992) (0.1909) (0.0727)

+ 0.6592Yt−1 + 2.5831Dumt R2 = 0.9156

(0.1036) (0.7549)

where Y = 3-month Treasury bill rate

P = expected rate of inflation

Un = seasonally adjusted unemployment rate

M = changes in the monetary base

Dum = dummy, taking value of 1 for observations beginning July 1, 1979

a. Interpret these results.

b. What has been the effect of interest rate deregulation? Do the results make

economic sense?
c. The coefficients of Pt , Unt, and Mt are negative. Can you offer an economic

rationale?

From book page no. 327, chapter no . 9 , exercise Q.no 9.9 ?