In this case, we investigate the effect of wage changes on inflation rate. Such effects can...

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In this case, we investigate the effect of wage changes on inflation rate. Such effects can be from the demand side or the supply side. On the supply side, we expect wage increases to increase production costs and drive up prices. On the demand side, wage increases mean higher disposable income and greater demand for goods and services, pushing up prices. Irrespective of the line of reasoning, the relationship between wage changes and inflation changes is likely to be dynamic; it takes time for wage changes to impact inflation. To investigate this dynamic relationship, we use quarterly data on Australia's inflation (using CPI) and wage growth (using wage price index) from 1997Q4 to 2022Q2. These data can be found in the file WageInf.xls Questions: a) Graph the time series for INF (Inflation rate) and WG (Wage Growth). Include a horizontal line at the mean of each series. Do the series appear to fluctuate around a constant mean? b) Estimate the model below. Interpret the estimate for 1. Is WG significant at 1%, 5% and 10%? Conduct a two-sided hypothesis testsing at these significance levels. What do you conclude? = INF. Bo+ B1 WG+u (1) regress inf wg Source | ss df MS Number of obs F(1, 97) Model 1.07419427 Residual 33.9769383 97 1 1.07419427 .350277714 Prob > F 99 3.07 0.0831 R-squared 0.0306 Adj 'R-squared = 0.0207 Total 35.0511325 98 .357664618 Root MSE = .59184 inf Coefficient Std. err. t P>|t| [95% conf. interval] wg _cons .5115978 2921417 1.75 0.083 -.0682225 1.091418 2632182 2279946 1.15 0.251 -.1892881 7157244 == INF Bo+B WG+u (1) c) Estimate the model below. How do these values compare with the estimate from part (b)? INF. Bo+B WG+ BINF-1 + (2) d) Estimate two new additional models. As the first model, add the variable INFt-2 to the model in part c. As the next model, include INF1-3. Report the results for each one. Why might you consider dropping INF1-2? Did its omission lead to a fall in AIC and SC? e) Try adding WG-1 as the next model. Does its inclusion improve the model? f) Which model best explains the inflation based on the results and your response to the answers above? In this case, we investigate the effect of wage changes on inflation rate. Such effects can be from the demand side or the supply side. On the supply side, we expect wage increases to increase production costs and drive up prices. On the demand side, wage increases mean higher disposable income and greater demand for goods and services, pushing up prices. Irrespective of the line of reasoning, the relationship between wage changes and inflation changes is likely to be dynamic; it takes time for wage changes to impact inflation. To investigate this dynamic relationship, we use quarterly data on Australia's inflation (using CPI) and wage growth (using wage price index) from 1997Q4 to 2022Q2. These data can be found in the file WageInf.xls Questions: a) Graph the time series for INF (Inflation rate) and WG (Wage Growth). Include a horizontal line at the mean of each series. Do the series appear to fluctuate around a constant mean? b) Estimate the model below. Interpret the estimate for 1. Is WG significant at 1%, 5% and 10%? Conduct a two-sided hypothesis testsing at these significance levels. What do you conclude? = INF. Bo+ B1 WG+u (1) regress inf wg Source | ss df MS Number of obs F(1, 97) Model 1.07419427 Residual 33.9769383 97 1 1.07419427 .350277714 Prob > F 99 3.07 0.0831 R-squared 0.0306 Adj 'R-squared = 0.0207 Total 35.0511325 98 .357664618 Root MSE = .59184 inf Coefficient Std. err. t P>|t| [95% conf. interval] wg _cons .5115978 2921417 1.75 0.083 -.0682225 1.091418 2632182 2279946 1.15 0.251 -.1892881 7157244 == INF Bo+B WG+u (1) c) Estimate the model below. How do these values compare with the estimate from part (b)? INF. Bo+B WG+ BINF-1 + (2) d) Estimate two new additional models. As the first model, add the variable INFt-2 to the model in part c. As the next model, include INF1-3. Report the results for each one. Why might you consider dropping INF1-2? Did its omission lead to a fall in AIC and SC? e) Try adding WG-1 as the next model. Does its inclusion improve the model? f) Which model best explains the inflation based on the results and your response to the answers above?