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Sample/practice exam 1 November 2015, questions -

oefententamen 2015
Applied Econometrics (Universiteit van Amsterdam)

StudeerSnel wordt niet gesponsord of ondersteund door een hogeschool of universiteit

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Example endterm Applied Econometrics

This exam is closed book. If you are asked to derive something, give all intermediate steps
also. Do not answer questions with a ”yes” or ”no” only, but carefully motivate your answer.
You can earn a maximum of 100 points equally divided among the 10 (sub)questions.

Question 1

Consider the following time series regression model:

Yt = 0 + 1 Xt + ut ; (1)

with t = 1; 2; : : : ; T , and where the errors follow an AR(1) process:

ut = ut 1 + "t : (2)

2
Furthermore, we assume that "t is i.i.d.(0; " ).

a. Rewrite (1) and (2) in the form of an Autoregressive Distributed Lag model.

b. Assume no outliers and no perfect multicollinearity. Which are the two other main
assumptions underlying the consistency and asymptotic normality of the OLS estima-
tor?

c. Suppose that Xt = Yt 1 in (1). Show that in this case the OLS estimator of 1 in (1)
is inconsistent.

d. Propose a solution for the case described in part c., which results in consistent estimates
again.

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Question 2

In this question numbers in parentheses below regression coe¢cients are estimated stan-
dard errors. A researcher wants to analyse the relation between consumption, income and
in‡ation (labelled c, y and i respectively). Available are annual data for the United Kingdom
for the period 1961-1993 (hence T = 33 observations). The following regression output is
generated:

dct = 2:07 + 0:005t 0:23 ct 1 + 0:40 ct 1 ;

(0:76) (0:002) (0:09) (0:17)

dyt = 2:42 + 0:004t 0:26 yt 1 + 0:22 yt 1 ;

(0:86) (0:002) (0:10) (0:17)

dit = 0:01 0:23 it 1 + 0:24 it 1 ;

(0:01) (0:11) (0:18)

ct = 2:25 + 1:21 yt 0:58 it + zt ;

(0:23) (0:02) (0:17)

dzt = 0:01 0:53 zt 1 + 0:14 zt 1 ;

(0:03) (0:13) (0:17)

cbt = 2:48 + 1:23 yt 0:61 it 0:37 yt 0:03 it ;

(0:28) (0:03) (0:12) (0:05) (0:11)

where zt is the OLS residual of the corresponding equation. Furthermore, in the last regres-
sion HAC standard errors have been used.

a. Test for unit roots in consumption, income and in‡ation.

b. Test for cointegration.

c. Construct a 95% con…dence interval for the cointegrating coe¢cient of income.

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Question 3

A researcher wants to measure the relation between property crime and the size of the
police force. Available are annual panel data on n = 59 U.S. cities in T = 23 years.
Available are the property crime rate (Yit ) and the number of police o¢cers per capita (Xit ).
Both variables are measured in logarithms. The researcher decides to estimate the dynamic
relation between crime and police with the following VAR(1) model based on panel data:

Yit = 11 Yi;t 1 + 11 Xi;t 1 + 1i + u1it ;

Xit = 21 Yi;t 1 + 21 Xi;t 1 + 2i + u2it ;

where 1i and 2i are city …xed e¤ects.

a. Give a motivation for including city …xed e¤ects in each equation of the panel VAR
model.

b. Write down a transformation of the data, which removes the city …xed e¤ects from the
model.

c. Consider the Stata output on the next pages. Is police (X) Granger-causing crime (Y )
or is crime Granger-causing police?

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xtreg y l.y l.x, fe

Fixed-effects (within) regression Number of obs = 1264

Group variable: city Number of groups = 59

R-sq: within = 0.7447 Obs per group: min = 19

between = 0.9941 avg = 21.4

overall = 0.8789 max = 22

F(2,1203) = 1754.53

corr(u_i, Xb) = 0.6650 Prob > F = 0.0000

------------------------------------------------------------------------------

y | Coef. Std. Err. t P>|t| [95% Conf. Interval]

-------------+----------------------------------------------------------------

L1.y | .8342867 .0150157 55.56 0.000 .8048268 .8637466

L1.x | -.018943 .0291462 -0.65 0.516 -.0761261 .0382401

_cons | 1.59329 .1661618 9.59 0.000 1.267291 1.919289

-------------+----------------------------------------------------------------

sigma_u | .03483758

sigma_e | .09097434

rho | .12788815 (fraction of variance due to u_i)

------------------------------------------------------------------------------

F test that all u_i=0: F(58, 1203) = 1.71 Prob > F = 0.0009

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xtreg x l.y l.x, fe

Fixed-effects (within) regression Number of obs = 1269

Group variable: city Number of groups = 59

R-sq: within = 0.6119 Obs per group: min = 18

between = 0.9988 avg = 21.5

overall = 0.9710 max = 22

F(2,1208) = 952.27

corr(u_i, Xb) = 0.9576 Prob > F = 0.0000

------------------------------------------------------------------------------

x | Coef. Std. Err. t P>|t| [95% Conf. Interval]

-------------+----------------------------------------------------------------

L1.y | .02819 .0093612 3.01 0.003 .009824 .046556

L1.x | .7193219 .0181943 39.54 0.000 .683626 .7550179

_cons | 1.269215 .103442 12.27 0.000 1.066269 1.472161

-------------+----------------------------------------------------------------

sigma_u | .09906014

sigma_e | .05690645

rho | .75187487 (fraction of variance due to u_i)

------------------------------------------------------------------------------

F test that all u_i=0: F(58, 1208) = 4.27 Prob > F = 0.0000

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