Table 22.7 gives data on three-month (TB3M) and six-month (TB6M) Treasury bill rates from January 1, 1982, to March 2008, for a total of 315 monthly observations. The data can be found on the textbook’s website.

a. Plot the two time series in the same diagram. What do you see?

b. Do a formal unit root analysis to find out if these time series are stationary.

c. Are the two time series cointegrated? How do you know? Show the necessary calculations.

d. What is the economic meaning of cointegration in the present context? If the two series are not cointegrated, what are the economic implications?

e. If you want to estimate a VAR model, say, with four lags of each variable, do you have to use the first differences of the two series or can you do the analysis in levels of the two series? Justify your answer.