SALALE UNIVERSITY

DEPARTMENT OF ECONOMICS
ECONOMETRICS II WORK SHEET
General instruction: Answer the following questions accordingly
1. Consider the following regression results:
̂

̂ ̂

Where =M1 money supply, = gross domestic product, measured in billions of birrs, is
natural , and ̂ represents the estimated residuals from regression 1.
I. Interpret regressions 1 and 2.
II. Do you suspect that regression 1 is spurious? Why?
III. Is regression 2 spurious? How do you know?
IV. From the results of regression 3, would you change your conclusion in b? And why?
Now consider the following regression
̂ ̂

What does this regression tell you? Does this help you decide if regression 1 is spurious or not?
2. Suppose you have estimated the following model of fertility and personal exemption:
̂

Where = birth per 1000 women in child bearing age and = average real dollar value of the
personal tax exemption.
i. Interpret the coefficient on , be specific?
ii. What is the long-run effect of on ?
iii. How would you augment the model if you suspect that some of the variables exhibit a linear
time trend?
iv. Suppose that and both have upward time trends, what would be a potential
consequence of not including a time trend in the regression model? What is this phenomenon
called?
v. Suppose that and both have upward time trends. How would you augment the model
to obtain a goodness-of-fit measure, which is not affected by the presence of time trend?
Show all work.
3. A researcher has time series data for aggregate consumption, c, and aggregate disposable personal
income, Y, for a certain country. She establish that the logarithm of both series are I(1) and she
correctly hypothesizes the long run relationship between them may be represented as:
 Where is a constant and is a multiplicative disturbance term, it may be assumed that is
normally distributed with zero mean and constant variance.
i. Explain what is meant when a series is described as being integrated of order one.
ii. Explain what is meant when two series are described as being cointegrated.
iii. The researcher believes that log C and log Y are cointegrated. How should she demonstrate
this?
iv. The relationship implies that the long run rate of consumption is equal to that of income.
Explain whether it is correct to describe the growth rate as being cointegrated.
4. Consider the following model 3.5

i. Describe whether each equations identified?

ii. Find the reduced form equations for Q and P?
iii. What kind of estimation method will you prefer for each equation? Explain?
Suppose the researcher estimated and obtain the following results for the reduced form of
equations: ́
́
iv. Retrieve the structural equation estimated coefficients using the above regression result.
5. Consider the following simultaneous equation model:

a. Is the model a time series or a cross sectional? Why?

b. Explain what it meant by the identification problem?
c. Explain why it would be inappropriate to use ordinary least squares to estimate the structural
coefficients in this model (no proofs required)
d. For each of the following cases determine whether equation (1) , equation (2) and the system is
identified:
i. The model is as above
ii. , and
iii. and
e. Suppose and explain exactly how you would estimate equation (1) using two-stage
least squares. Could you use the same procedure to estimate equation (2)? Why or why not?
6. From data for 54 standard metropolitan statistical areas (SMSA), Demaris estimated the following logit
model to explain high murder rate versus low murder rate:

where O= the odds of a high murder rate, P=1980 population size in thousands, C= population growth
rate from 1970 to 1980, R = reading quotient, and the se arethe asymptotic standard errors.
a. How would you interpret the various coefficients?
b. Which of the coefficients are individually statistically significant?
c. What is the effect of a unit increase in the reading quotient on the odds of having a higher
murder rate?
d. What is the effect of a percentage point increase in the population growth rate on the odds of
having a higher murder rate?