Economics 421Homework #4
Due June 24
1) You estimate a quarterly model on 40 observations and obtain the following results with t-statistics in parentheses.
Consumption = -48.7 + .68Income - .04intrate
(-2.7) (2.1) (-1.9)
R2 = .75, dw = 1.35
Test for the presence of autocorrelation and determine the magnitude of the correlation between the errors. If autocorrelation is present what can be said about the results of the estimation?
2) Explain how to correct for autocorrelation if it exists in question 1.
3) Use the third data set from my homepage to answer the following questions:
a) If Y is the dependent variable and X1 is the independent variable, test the hypothesis that b1 = 1. Do the residuals exhibit autocorrelation?
b) Correct for the autocorrelation. Is your inference about b1 different? Why or why not?
c) If X2 is added as a regressor, does the autocorrelation remain? What does this suggest?
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