# Use the data in APPROVAL to answer the following questions. (i) Estimate the equation using first differencing and test the

## Question:

Use the data in APPROVAL to answer the following questions.

(i) Estimate the equation

using first differencing and test the errors in the first-differenced (FD) equation for AR(1) serial correlation. In particular, let ê_{t} be the OLS residuals in the FD estimation and regress ê_{t} on ê_{t–1}; report the p-value of the test. What is the estimate of ρ?

(ii) Estimate the FD equation using Prais-Winsten. How does the estimate of β_{2} compare with the OLS estimate on the FD equation? What about its statistical significance?

(iii) Return to estimating the FD equation by OLS. Now obtain the Newey-West standard errors using lags of one, four, and eight. Discuss the statistical significance of the estimate of β_{2} using each of the three standard errors.

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**Related Book For**

## Introductory Econometrics A Modern Approach

**ISBN:** 9781337558860

7th Edition

**Authors:** Jeffrey Wooldridge

**Question Details**

**12**

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