Question: 14.4 The forecaster in Exercise 14.2 augments her AR(4) model for IP growth to include four lagged values of Rt, where Rt is the interest

14.4 The forecaster in Exercise 14.2 augments her AR(4) model for IP growth to include four lagged values of Rt, where Rt is the interest rate on 3-month U.S. Treasury bills (measured in percentage points at an annual rate).

a. The Granger-causality F-statistic on the four lags of Rt is 4.16. Do interest rates help predict IP growth? Explain.

b. The researcher also regresses Rt on a constant, four lags of Rt and four lags of IP growth. The resulting Granger-causality F-statistic on the four lags of IP growth is 1.52. Does IP growth help to predict interest rates? Explain.

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