Use the data in APPROVAL to answer the following questions. See also Computer Exercise C14 in Chapter 10.

(i) Compute the first order autocorrelations for the variables approve and lrgasprice. Do they seem close enough to unity to worry about unit roots?

(ii) Consider the model

where the first two variables are in logarithmic form. Given what you found in part (i), why might you hesitate to estimate this model by OLS?

(iii) Estimate the equation in part (ii) by differencing all variables (including the dummy variables). How do you interpret your estimate of β₂? Is it statistically significant? (Report the p-value.)

(iv) Interpret your estimate of β₄ and discuss its statistical significance.

(v) Add lsp500 to the model in part (ii) and estimate the equation by first differencing. Discuss what you find for the stock market variable.

Transcribed Image Text:

approve, = Bo + Bilcpifood, + B,lrgasprice, + Bzunemploy, + B4sep11, + Bsiraqinvade, + u;,