(a) To create time series plots of the variables yt, xt, and the share of Toyota in all produced

passenger cars (yt/(yt + xt)), you can use software like Python, R, or Excel. Plotting the data
will help you visualize the patterns, trends, and relationships between the variables.

(b) (i) The Augmented Dickey-Fuller (ADF) test is used to test for the presence of a unit root
in a time series. You can apply the ADF test to variable yt using lagged differences and
including a constant term. The coefficient of yt-1 will provide insights into the stationarity of
the series.

(ii) Perform a similar ADF test for variable xt to examine its stationarity.

(c) The Engle-Granger test is used to test for cointegration between two time series. In step
1, regress yt on a constant and xt. In step 2, regress the residuals from step 1, denoted as et,
on lagged differences of et, including a constant term. The significance of the coefficients in
the second step will indicate the presence of cointegration.

(d) Construct the sample autocorrelations and sample partial autocorrelations of ∆yt
(differenced yt). Examine the lagged terms to identify significant autocorrelation patterns.
Based on the outcomes, you can motivate an AR(12) model for ∆yt and estimate the model
using the provided estimation sample.

(e) Extend the AR(12) model from part (d) by adding the Error Correction (EC) term (yt −
0.45xt). Estimate the Error Correction Model (ECM) using the provided estimation sample.
Check the significance of the EC term at the specified levels.

(f) Use the estimated models from parts (d) and (e) to forecast monthly changes in production
of Toyota passenger cars for 2000. For each month, use the available data up to and including
the previous month to make forecasts. Calculate the root mean squared error (RMSE) and
mean absolute error (MAE) for the forecasted series and interpret the outcomes.

Remember to adjust the steps and calculations according to the specific dataset and variables
you have available.