econ

ECON 402

Problem Set 2

Gonzalo Garcia – Spring 2019

Due on ELMS at 6 pm on February 14, 2019.

No late submissions are accepted.

1. Explain each in a few sentences:

a. What is the purpose / goal of running a regression? (2 points)

b. What are the regressand, regressor, dependent variable and

independent variable in the regression context? (1 point)

2. Consider the regression output below and answer each question. The

frequency is quarterly, and the variables are defined at annual rates as

follows: INT_RATE_3M is the 3-Month Treasury Bill, INF_RATE is the

inflation rate, UNRATE is the unemployment rate, and EMP_GROWTH

corresponds to the employment growth rate.

a) How is the goodness of fit? How can you tell? (1 point)

b) For each of the 3 independent variables in the regression, state if their

coefficient is statistically significant at 5% level. (1 point)

c) For the same variables in (b), construct 90% confidence intervals. (1

points)

d) What do you learn from Akaike and Schwarz criteria? (1 point)

e) Now we run the same regression dropping INF_RATE as a regressor.

Below is the result:

Focusing on the coefficient of EMP_GROWTH (and its significance),

compare with the corresponding coefficient in the first output. Is its

significance similar or different? If similar, explain why this had to be the

case. If different, explain how they can be different. (1 points)

f) Once again comparing the two regression outputs, which model

provides a better fit to the data. Explain how you reach this

conclusion. (2 points)