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


Use the data in APPROVAL to answer the following questions. 

(i) Estimate the equation

approve, = Bo + Bilcpifood, + Balrgasprice, + Bzunemploy, + Basep11, + Bsiraqinvade, + u,

using first differencing and test the errors in the first-differenced (FD) equation for AR(1) serial correlation. In particular, let êt be the OLS residuals in the FD estimation and regress êt on êt–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 β2 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 β2 using each of the three standard errors.

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Chapter # 12
Section: Computer Exercises
Problem: 16
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Question Posted: July 02, 2020 04:13:07