# The Australian National University Research School of Economics Economic Models and Introductory Econometrics (EMET8005) Semester 1, 2012

Assignment 3 Submit by 1 June 2012, 4:30 pm, in the box assigned to EMET8005 outside the Research School of Economics main office on the first floor of Arndt building. All hypothesis tests should be performed at the 5% level of significance, unless stated otherwise. In each case, the null and the alternative hypotheses, as well as the test statistic, its distribution under the null and the conclusion from the test in terms of the model, must be clearly stated for full marks. Please attach your estimation output to your assignment. Other requirements for assignments were given in the course outline. Question 1. Text, Q 7.21. Also, find and plot the IRF’s for impulses to PG and RI in your preferred model. Note that adding lags results in a loss of observations, and this matters in the model selection criteria and hypothesis tests when the sample is this small. The EViews statement
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means that there are the same numbers of observations in the models with no, one and two lags. Question 2. Consider the MA(2) model,

xt = α0 + ut + α1 ut-1 + α2 ut-2
where ut is zero mean white noise with variance σu2. Find the mean, variance and ACF of xt. Question 3. Suppose that a variable y comes from the model yt = β t + εt for t = 1, ..., T, where β ≠ 0; and a variable x comes from the model xt = α t + ut for t = 1, ..., T, where α ≠ 0. Assume that εt and ut are zero mean white noise and are uncorrelated with each other at all lags. You regress y on x, without an intercept. What does the OLS estimator converge to? For full marks in the question you need to consider each of the terms in the OLS estimator. Notes: • Chebyshev’s Inequality tells us that a sequence of random variables Xt, t=1,2,…, with mean µ (such as a sequence of means, using 1, 2, ... observations on a variable) converges in probability to µ as T → ∞ when var(Xt) converges to zero as T → ∞ . • Question 4.2 in the text gives the formula for the sum of t2’s. What happens if you divide the sum by T3? 1