Econ 505: Economic Models and Forecasting Homework Assignment #2 jj espinoza Problem 1
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Using the concept of co-integration analysis, show that regressing PCE on PDI does not involve a spurious regression, although both series are I (1). Hint: work on the properties of residuals of the regression results. If there is a long term relationship between two variables then they are said to be cointegrated. There will not be a spurious regression between these two variables, and here is how we prove this for the case of PCE and PDI. 
Running the regression we get the following regression: 
 and the following equation 
We must now test the stationary of the error term u we will follow the following steps: Graphical Approach Augmented Dickey-Fuller Test Correlelogram The error term looks stationary, but graphical evidence should be supported by stats We know run more statistical test on the error term to get a quantitative measure of what appears to be a stationary process: 
The Null Hypothesis is that U has a unit root and we cannot reject this hypothesis at even a 1% level. Therefore we can be safe assuming that the error term is purely a random walk process therefore u(0) and PCE and PCI are cointegrated. Directory: 2009 2009 -> The Truth about the Rwandan Genocide 2009 -> Guide to learn how to install, set up and access the music you need today! 2009 -> Lesson #11: Words with 2009 -> Terry L. Root 2009 -> The environment in the news 2009 -> Town of Nags Head Annual Report 2009 -> Cemir international Download 0.67 Mb. Share with your friends:
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