Homework 6
100 points
There are two problems in this homework.
Problem 1 should be submited in the standard format we’ve used many times: The first pages should contain your answers to all the questions, along with showing any key algebraic equations or explanations you need to use along the way. After that, include a printout of the output from the regressions you executed in support of your answers. Highlight any numbers in this output that you used in the first section. (You are encouraged to save paper here, you may print this section with a small font, double-sided and/or with 2-up format.) Last, include a copy of the DO file that contains the commands you asked STATA to execute. Be sure you organize these in a way that will be clear to the reader.
Problem 2 will be presented in a slightly different, more polished style. Please refer to that specific problem for details.
Problem 1
The dataset Phillips.dta contains information on the civilian unemployment rate and the cpi inflation rate. The data is available from 1948 through 2010, and was downloaded via FRED.
Part 1
import the dataset and let STATA know it is time series with the command tsset year.
Estimate an AR(1) model fot the unemployment rate. (That is, regress unemp on a single lag of unemp.) Do this for observations of the year>=1951. You should use the “lag operator” in STATA to do this (L.unemp).
Calculate the BIC with the command estat ic.
Repeat b) and c) for an AR(2) and AR(3).
Use the BIC to determine what is the optimal lag length (q) for unemployment in this AR(q)?
What is the predicted unemployment rate for 2011 according to the AR(1) model? (Use the coefficients and the data to calculate the expected value for 2011.) What is it for the AR(2) and AR(3) models?
The actual unemployment rate in 2011 was 9.0. What is the difference between the predicted values and actual for the AR(1), AR(2) and AR(3) models.
Part 2)
Add the lag of the cpi_inf rate to the AR(2)…