Question: Use the data in PHILLIPS for this exercise. (i) Using all of the yearsthrough 2017run the regression Dinf t on inf t1 (and an intercept)

Use the data in PHILLIPS for this exercise.

(i) Using all of the years—through 2017—run the regression Dinf_t on inf_t–1 (and an intercept) and test the null hypothesis that {inf_t} is I(1) against the alternative that it is I(0). At what significance level do you reject the null hypothesis?

(ii) What is the estimated value of µ from part (i)? Would you say it is practically different from one?

(iii) Now run the augmented Dickey-Fuller regression by including Dinf_t–1 as a regressor. Do your conclusions from part (i) change? Does it appear Dinf_t–1 needs to be in the regression?

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