Average annual interest rates (banks, prime lending) in the United States from 1980 through 2006 are shown in the following time series graph:

a) What components do you see in this series? Here’s a linear trend model fit to these data:

Dependent variable is: Interest Rate

R-squared = 69.9% R-squared (adjusted) = 68.7%

s = 1.732 with 27 - 2 = 25 degrees of freedom

b) Interpret the trend coefficient mean in this model.

c) Predict the interest rate for 2006. Do you trust the prediction? Why or why not? Here’s a time series plot of the residuals from this model:

d) Discuss any patterns you see in this plot.

e) Would an exponential transformation likely do better for these data? Explain.

Transcribed Image Text:

E 12 6. 3 + 1980 1985 1990 1995 2000 2005 Year Interest Rate (%) SE(Coeff) t-ratio 7.70 85.30 0.0428 -7.63 Variable P-value Coeff 656.539 Intercept Year <0.0001 <0.0001 -0.326490