Question: Using the data set given in problem 8-31, the researcher obtains both AR(1) and AR(2) models with the following results ( standard errors in parentheses):

Using the data set given in problem 8-31, the researcher obtains both AR(1) and AR(2) models with the following results ( standard errors in parentheses):

t t-1 t y = 2.75 + 0.78y + e SE: (3.562) (0.09)

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t t-1 t-2 t y = 2.5 + 0.75y + 0.18 y + e SE: (3.562) (0.10) (0.07)

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(i) Would you prefer the AR(2) model to the AR(1)? Why? How would you check whether an ARMA(2, 1) model may be more appropriate?

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