Question: The function ivreg() from package AER will fit instrumental variable (IV) regressions. Using the USConsump1993 data taken from Baltagi (2002), estimate the simple Keynesian consumption

The function ivreg() from package AER will fit instrumental variable (IV) regressions. Using the USConsump1993 data taken from Baltagi (2002), estimate the simple Keynesian consumption function expendituret = β0 + β1incomet + εt

(a) by OLS.

(b) by IV. The only available instrument is investment, given by the identity expenditure + investment = income.

(c) Compare both sets of estimates using a Hausman test, thus replicating Baltagi (2002, Section 11.7). What do you conclude?

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