Advance Econometric problems

1. Using the data provided for the four equation macro model we have been using, examine the consumption function: CO = β1+ β2 YD + β3 CO(-1) + ε

REMEMBER TO INDICATE YOUR NULL AND ALTERNATIVE HYPOSTHESES AND SIGNIFICANCE LEVEL IF WARRANTED.

SHOWING ALL WORK NEATLY AND IN AN ORDERLY READABLE WAY (indicating the relevant test):

i. (5 pts) Estimate the above equation using all the data with OLS

ii. (5 pts) Examine for normality of the error term

iii. (10 pts) Examine for multicollinearity

iv. (10 pts) Examine for heteroscedasticity

v. (10) Examine for serial correlation

vi. (15) Examine for the violation of the Full Ideal Conditions using the Ramsey (RESET) Test

2. (20) Re-estimate the above consumption function with Two Stage Least Squares using all the possible instruments (including a constant). Note: there are five exogenous variables – not counting the constant term.

3. (10) Consider the Demand and Supply model below where QD is the quantity demanded and QS is the quantity supplied; P is price:

QD = β1 + β2 P + ε and

QS = α1 + α2 P + µ

ε and µ are the error terms.

The model as is cannot be identified. Redesign the model so both equations are over-identified using the minimum number of instruments and defining any terms.