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34197ch21 Ans PDF
34197ch21 Ans PDF
CHAPTER 21:
TIME SERIES ECONOMETRICS: SOME BASIC CONCEPTS
21.3 Loosely speaking, the term unit root means that a given time
series is nonstationary. More technically, the term refers to the
root of the polynomial in the lag operator.
21.5 The DF test is a statistical test that can be used to determine if a time
series is stationary. The ADF is similar to DF except that it takes
into account the possible correlation in the error terms.
21.6 The EG and AEG tests are statistical procedures that can be used to
to determine if two time series are cointegrated.
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21.11 Most economic time series exhibit trends. If such trends are
perfectly predictable, we call them deterministic. If that is not case,
we call them stochastic. A nonstationary time series generally
exhibits a stochastic trend.
Empirical Exercises
21.16 (a) The correlograms for all these time series very much resemble
the log GDP correlogram given in Fig. 21.8. All these correlograms
suggest that these time series are nonstationary.
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Basic Econometrics, Gujarati and Porter
Thus, we see that all the given time series are nonstationary. The
results of the Dickey-Fuller test with no trend and no trend and no
intercept did not alter the conclusion.
21.18 If the error terms in the model are serially correlated, ADF is the
more appropriate test. The τ statistics for the appropriate coefficient
from the ADF regressions for the three series are:
log PCE -1.73
log DPI -1.44
log Profits -3.14
log Dividends -1.42
The critical τ values remain the same as in Problem 21.17. Again,
the conclusion is the same, namely, that the three time series
are nonstationary.
21.19 (a) Probably yes, because individually the two time series
are nonstationary.
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(e) If log Dividends and log Profits are cointegrated, it does not
matter which is the regressand and which is the regressor. Of
course, finance theory could resolve this matter.
21.20 The scattergrams of the first differences of log DPI, log Profits, and
log Dividends, all show diagrams similar to Fig. 21.9. In the first
difference form each of these time series is stationary. This can be
confirmed by the ADF test.
21.21 In theory there should not be an intercept in the model. But if there
was a trend term in the original model, then an intercept could be
included in the regression and the coefficient of that intercept term
will indicate the coefficient of the trend variable. This of course
assumes that the trend is deterministic and not stochastic.
To see this, we first regressed log Dividends on log Profits and the
trend variable, which gave the following results:
R-squared 0.9914
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Basic Econometrics, Gujarati and Porter
R-squared 0.01524
This exercise shows that one should be very careful in including the
trend variable in a time series regression unless one is sure that the
trend is in fact deterministic. Of course, one can use the DF and
ADF tests to determine if the trend is stochastic or deterministic.
21.22 From the first difference regression given in the preceding exercise,
we can obtain the residuals of this regression ( uˆt ) and subject them
to unit root tests. We regressed ∆uˆt on its own lagged value without
intercept, with intercept, and with intercept and trend. In each case
the null hypothesis was that these residuals are nonstationary, that is,
they contain a unit root test. The Dickey-Fuller τ values for the
three options were -17.05, -17.01, and -17.22. In each case the
hypothesis was rejected at 5% or better level (i.e., p value lower than
5%). In other words, although log Dividends and log Profits were
not cointegrated, they were cointegrated in the first difference form.
21.23 (a) Since τ is less than the critical τ value, it seems that the
housing start time series is nonstationary. Therefore, there is
a unit root in this time series.
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Basic Econometrics, Gujarati and Porter
20
Y
0
0 500 1000
X
Y exhibits a linear trend, whereas X represents a quadratic
trend.
40
20
5
0 0
-5
-10
10 20 30
From the given regression results you might think that this
is a "good" regression in that it has a high R2 and significant
t ratios. But it is a totally spurious relationship, because we
are regressing a linearly trended variable (Y) on a quadratically
trended variable (X). That something is not right with this model
can be gleaned from the very low Durbin-Watson d value.
The point of this exercise is to warn us against reading too much in
the regression results of two deterministically trended variables with
divergent time paths.
21.26 (a) Regression (1) shows that the elasticity of M1 with respect to
GDP is about 1.60, which seems statistically significant, as the t
value of this coefficient is very high. But looking at the d value, we
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(c) & (d) From regression (3) it seems that the two variables are
cointegrated, for the 5% critical τ value is –1.9495 and the
estimated tau value is more negative than this. However, the 1%
critical tau value is –2.6227, suggesting that the two variables
are not cointegrated. If we allow for intercept and intercept and
trend in equation (3), then the DF test will show that the two
variables are not cointegrated.
(e) Equation (2) gives the short-run relationship between the logs
of money and GDP. The equation given here takes into account the
error correction mechanism (ECM), which tries to restore the
equilibrium in case the two variables veer from their long-run path.
However, the error term in this regression is not statistically
significant at the 5% level.
21.27 (a) & (b) The time graph of CPI very much resembles Fig. 21.12.
This graph clearly shows that generally there is an upward trend in
the CPI. Therefore, regression (1) and (2) are not worth
considering. Note that the coefficient of the lagged CPI is positive
in both cases. For stationarity, we require this value to be negative.
(c) Since Equation (1) omits two variables, we have to use the
F test.
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Basic Econometrics, Gujarati and Porter
(0.507 − 0.0703) / 2
F= = 19.9305
(1 − 0.507) / 45
Referring to the DF F values given in Table D.7 in App. D, you can
see that the observed F value is highly significant (Note: The table
does not give the F value for 40 observations, but mentally
interpolating the given F values, you will reach this conclusion.).
Hence, the conclusion is that the restrictions imposed by regression
(1) are invalid. More positively, it is regression (3) that seems valid.
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