Question 1

1. Regression

Dependent Variable: INFLATION

Method: Least Squares
Date: 10/30/20 Time: 12:03
Sample (adjusted): 1986M04 2013M04
Included observations: 325 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.  

C 0.241694 0.021326 11.33318 0.0000

RSANDP -0.003368 0.003672 -0.917365 0.3596
DCREDIT 1.78E-06 1.79E-06 0.990198 0.3228
DPROD -0.019738 0.030753 -0.641802 0.5215
DMONEY -0.003164 0.000820 -3.858319 0.0001
DSPREAD -0.936959 0.158177 -5.923491 0.0000
FEB03DUM 0.441516 0.298741 1.477923 0.1404

R-squared 0.172507     Mean dependent var 0.233696

Adjusted R-squared 0.156894     S.D. dependent var 0.324318
S.E. of regression 0.297791     Akaike info criterion 0.436454
Sum squared resid 28.20009     Schwarz criterion 0.517952
Log likelihood -63.92377     Hannan-Quinn criter. 0.468980
F-statistic 11.04891     Durbin-Watson stat 1.267379
Prob(F-statistic) 0.000000

2. Normality Test
70
Series: Residuals
60 Sample 1986M04 2013M04
Observations 325
50
Mean 5.52e-17
40
Median -0.014928
30 Maximum 0.916137
Minimum -1.590777
20 Std. Dev. 0.295021
Skewness -0.308129
10 Kurtosis 6.127951

0 Jarque-Bera 137.6355
-1.5 -1.0 -0.5 0.0 0.5 1.0
Probability 0.000000

Hypothesis
1.0

H0: Normal distribution 0.5

H1: Not normal distribution

P-VALUE (0.0000) is less 0.0 than 0.05. Reject

H0.
RESID

-0.5
In conclusion, since we reject H0, so there is
not normal distribution.
-1.0
b.

-1.5

-2.0
-30 -20 -10 0 10 20

RSANDP
There seems to be a pattern for the residuals. This might indicate the presence of heteroscedasticity.

c. Test for Heteroskedasticity (Without cross terms)

Heteroskedasticity Test: White
Null hypothesis: Homoskedasticity

F-statistic 3.840586     Prob. F(6,318) 0.0010

Obs*R-squared 21.95949     Prob. Chi-Square(6) 0.0012
Scaled explained SS 53.90434     Prob. Chi-Square(6) 0.0000

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 10/30/20 Time: 12:24
Sample: 1986M04 2013M04
Included observations: 325

Variable Coefficient Std. Error t-Statistic Prob.  

C 0.067908 0.012588 5.394707 0.0000

RSANDP^2 -0.000117 0.000248 -0.472882 0.6366
DCREDIT^2 -7.79E-12 1.37E-11 -0.569569 0.5694
DPROD^2 0.013811 0.010519 1.312946 0.1901
DMONEY^2 2.64E-05 9.17E-06 2.882188 0.0042
DSPREAD^2 0.497920 0.195710 2.544180 0.0114
FEB03DUM^2 -0.070628 0.192200 -0.367474 0.7135

R-squared 0.067568     Mean dependent var 0.086770

Adjusted R-squared 0.049975     S.D. dependent var 0.196792
S.E. of regression 0.191812     Akaike info criterion -0.443299
Sum squared resid 11.69981     Schwarz criterion -0.361801
Log likelihood 79.03602     Hannan-Quinn criter. -0.410773
F-statistic 3.840586     Durbin-Watson stat 2.025818
Prob(F-statistic) 0.001031

Hypothesis

H0: Homoskedastic residuals

H1: Heteroskedatic residuals

P-value (0.0010) is less than 0.05.

Reject H0

In conclusion, there are heteroskedastic residuals.

Test for Heteroskedasticity (With cross terms)

Heteroskedasticity Test: White
Null hypothesis: Homoskedasticity

F-statistic 7.169546     Prob. F(21,303) 0.0000

Obs*R-squared 107.8845     Prob. Chi-Square(21) 0.0000
Scaled explained SS 264.8259     Prob. Chi-Square(21) 0.0000

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 10/30/20 Time: 12:27
Sample: 1986M04 2013M04
Included observations: 325
Collinear test regressors dropped from specification

Variable Coefficient Std. Error t-Statistic Prob.  

C 0.086392 0.017270 5.002394 0.0000

RSANDP^2 -0.000142 0.000251 -0.567197 0.5710
RSANDP*DCREDIT 5.56E-07 3.05E-07 1.819301 0.0699
RSANDP*DPROD -0.001383 0.003312 -0.417610 0.6765
RSANDP*DMONEY 2.42E-06 0.000127 0.019039 0.9848
RSANDP*DSPREAD 0.000152 0.019384 0.007821 0.9938
RSANDP*FEB03DUM 0.071236 0.097693 0.729181 0.4665
RSANDP -0.006170 0.003011 -2.049298 0.0413
DCREDIT^2 -4.75E-11 3.40E-11 -1.395638 0.1638
DCREDIT*DPROD 2.85E-06 2.53E-06 1.129097 0.2598
DCREDIT*DMONEY 4.55E-09 5.84E-08 0.077915 0.9379
DCREDIT*DSPREAD -3.51E-05 1.32E-05 -2.667964 0.0080
DCREDIT 2.26E-09 1.61E-06 0.001409 0.9989
DPROD^2 -0.025256 0.015298 -1.650940 0.0998
DPROD*DMONEY 0.004495 0.000761 5.907077 0.0000
DPROD*DSPREAD -1.478382 0.187581 -7.881315 0.0000
DPROD -0.079431 0.024604 -3.228430 0.0014
DMONEY^2 1.29E-05 1.25E-05 1.031021 0.3034
DMONEY*DSPREAD 0.006239 0.003884 1.606324 0.1092
DMONEY -0.000288 0.000735 -0.392626 0.6949
DSPREAD^2 1.314288 0.365973 3.591219 0.0004
DSPREAD 0.112657 0.123354 0.913281 0.3618

R-squared 0.331952     Mean dependent var 0.086770

Adjusted R-squared 0.285652     S.D. dependent var 0.196792
S.E. of regression 0.166327     Akaike info criterion -0.684428
Sum squared resid 8.382411     Schwarz criterion -0.428292
Log likelihood 133.2195     Hannan-Quinn criter. -0.582204
F-statistic 7.169546     Durbin-Watson stat 1.890368
Prob(F-statistic) 0.000000

White’s Test

Hypothesis

H0: Homoskedastic residuals

H1: Heteroskedatic residuals

P-value (0.000) is less than 0.05.

Reject H0

In conclusion, there are heteroskedastic residuals.

Compared with a, this means that one of our assumptions of our linear regression model has been
violated.

d) Coefficients stay the same but standard errors have been corrected.
Dependent Variable: INFLATION
Method: Least Squares
Date: 10/30/20 Time: 12:40
Sample (adjusted): 1986M04 2013M04
Included observations: 325 after adjustments
Huber-White-Hinkley (HC1) heteroskedasticity consistent standard
        errors and covariance

Variable Coefficient Std. Error t-Statistic Prob.  

C 0.241694 0.022668 10.66212 0.0000

RSANDP -0.003368 0.003619 -0.930664 0.3527
DCREDIT 1.78E-06 1.50E-06 1.183731 0.2374
DPROD -0.019738 0.043652 -0.452156 0.6515
DMONEY -0.003164 0.001077 -2.936989 0.0036
DSPREAD -0.936959 0.237696 -3.941832 0.0001
FEB03DUM 0.441516 0.024886 17.74157 0.0000

R-squared 0.172507     Mean dependent var 0.233696

Adjusted R-squared 0.156894     S.D. dependent var 0.324318
S.E. of regression 0.297791     Akaike info criterion 0.436454
Sum squared resid 28.20009     Schwarz criterion 0.517952
Log likelihood -63.92377     Hannan-Quinn criter. 0.468980
F-statistic 11.04891     Durbin-Watson stat 1.267379
Prob(F-statistic) 0.000000     Wald F-statistic 194.1312
Prob(Wald F-statistic) 0.000000

e) Other than White’s robust formula, we could have used Weighted Least Squares (WLS) to remove
the heteroscedasticity. This may provide us with a better estimator. Other than that, we can
transform the variables into log or by reducing measures in ‘size’