In Section 8.3.4, Final Comments, we propose extensions for the AR(4) model to include mortgage rates Rt = {rt1, rt2, . . . . }

In Section 8.3.4, Final Comments, we propose extensions for the AR(4) model to include mortgage rates Rt = {ˆ†rt€“1, ˆ†rt€“2, . . . . } and information in employ- ment (emp) Ut = {ˆ† empt€“1, empt€“2, . . . . .}. Examine the following models:
i.

ii.

iii.

Estimate and evaluate these three models, and construct the corresponding multistep forecasts. Are the forecasts any different from those provided by the pure AR(4)? Do mortgages rates or/and employment provide additional forecast ability for house price growth?

Y, =c+ 6,Y,-1+bY 2+ d,Y-3 + db,Y-4+ aR, + e,