1. ECON G26/27/28/29/48 Exercise Sheet 3 The following wage equation was estimated using quarterly data from...

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1. ECON G26/27/28/29/48 Exercise Sheet 3 The following wage equation was estimated using quarterly data from 2000 Q1 to 2010 Q4 (44 observations), with standard errors in parentheses: A4ln W = 11.455 + 0.268 A4lnP -0.242 U - 0.112 T - 0.197 Dcrisis (1.214) (0.062) (0.072) (0.087) (0.046) Total sum of squares = 90.255; Residual sum of squares = 12.919; Sample size = 44 where W = Wage P= Price U = Percentage rate of unemployment T = Time trend Dcrisis = Dummy variable for the financial crisis (1 for crisis, 0 otherwise) A4Xt=Xt-Xt-4 a) Interpret A4ln Wt. b) It is claimed that the financial crisis reduced annual wage inflation. Test this hypothesis using the dummy variable at the 5% significance level. c) Calculate the standard error of the equation d) Construct a 95 per cent confidence interval for the effect of price inflation on wage inflation. It is believed that the coefficient should equal 1. Comment on this proposition. e) Calculate R and adjusted R. f) Test for the overall significance of the regression. g) h) When seasonal dummies were added to the equation, the residual sum of squares reduced to 10.017. Test the null hypothesis that the seasonal dummies should not be included in the equation. It is thought that the parameters of the equation were not stable with the break taking place in 1996 first quarter. Regression equations were run for the following subsamples: 2000 Q1-2005 Q4 Residual sum of squares = 4.532 Undertake: 2006 Q1-2010 Q4 Residual sum of squares = 5.211 i) a Chow test ii) a forecast test. 1. ECON G26/27/28/29/48 Exercise Sheet 3 The following wage equation was estimated using quarterly data from 2000 Q1 to 2010 Q4 (44 observations), with standard errors in parentheses: A4ln W = 11.455 + 0.268 A4lnP -0.242 U - 0.112 T - 0.197 Dcrisis (1.214) (0.062) (0.072) (0.087) (0.046) Total sum of squares = 90.255; Residual sum of squares = 12.919; Sample size = 44 where W = Wage P= Price U = Percentage rate of unemployment T = Time trend Dcrisis = Dummy variable for the financial crisis (1 for crisis, 0 otherwise) A4Xt=Xt-Xt-4 a) Interpret A4ln Wt. b) It is claimed that the financial crisis reduced annual wage inflation. Test this hypothesis using the dummy variable at the 5% significance level. c) Calculate the standard error of the equation d) Construct a 95 per cent confidence interval for the effect of price inflation on wage inflation. It is believed that the coefficient should equal 1. Comment on this proposition. e) Calculate R and adjusted R. f) Test for the overall significance of the regression. g) h) When seasonal dummies were added to the equation, the residual sum of squares reduced to 10.017. Test the null hypothesis that the seasonal dummies should not be included in the equation. It is thought that the parameters of the equation were not stable with the break taking place in 1996 first quarter. Regression equations were run for the following subsamples: 2000 Q1-2005 Q4 Residual sum of squares = 4.532 Undertake: 2006 Q1-2010 Q4 Residual sum of squares = 5.211 i) a Chow test ii) a forecast test.