The regression output gives the result of regressing LGELEC, the logarithm of consumer expenditure on electricity,...

 

Transcribed Image Text:

The regression output gives the result of regressing LGELEC, the logarithm of consumer expenditure on electricity, on LGDPI, the logarithm of disposable personal income, LGPRELEC, the logarithm of a relative price index for electricity, and LGELEC lagged one year, using annual aggregate data for the United States for the period 1960 - 1994. Potential problems of nonstationarity may be ignored. LGELEC = -0.0367 +0.0753LGDPI – 0.0447PRELEC + 0.9161LGELEC(-1) R = 0.998 (0.836) (0.135) (0.052) (0.100) 1.1. [5 marks] Show how this regression specification could be derived from a partial adjustment model. 1.2. [5 marks] Explain the short-run and long-run dynamics inherent in such a model. 1.3. [5 marks] Give an economic interpretation of the regression results, paying attention to both short-run and long-run dynamics. 1.4. [5 marks] Comment on the plausibility of the estimated short-run and long-run effects. 1.5. [5 marks] At a seminar, a commentator points out that the regression specification could also have been derived from an adaptive expectations model. State whether the adaptive expectations model might be a more suitable framework for this model. (Note: a mathematical demonstration that the regression specification could have been derived from an adaptive expectations model is not required and no credit will be given for it). 1.6. [5 marks] Another commentator notes that the t statistics for the coefficients of LGDPI and LGPRELEC are low and argues that those variables should therefore be dropped from the regression model. State the arguments for and against this. The regression output gives the result of regressing LGELEC, the logarithm of consumer expenditure on electricity, on LGDPI, the logarithm of disposable personal income, LGPRELEC, the logarithm of a relative price index for electricity, and LGELEC lagged one year, using annual aggregate data for the United States for the period 1960 - 1994. Potential problems of nonstationarity may be ignored. LGELEC = -0.0367 +0.0753LGDPI – 0.0447PRELEC + 0.9161LGELEC(-1) R = 0.998 (0.836) (0.135) (0.052) (0.100) 1.1. [5 marks] Show how this regression specification could be derived from a partial adjustment model. 1.2. [5 marks] Explain the short-run and long-run dynamics inherent in such a model. 1.3. [5 marks] Give an economic interpretation of the regression results, paying attention to both short-run and long-run dynamics. 1.4. [5 marks] Comment on the plausibility of the estimated short-run and long-run effects. 1.5. [5 marks] At a seminar, a commentator points out that the regression specification could also have been derived from an adaptive expectations model. State whether the adaptive expectations model might be a more suitable framework for this model. (Note: a mathematical demonstration that the regression specification could have been derived from an adaptive expectations model is not required and no credit will be given for it). 1.6. [5 marks] Another commentator notes that the t statistics for the coefficients of LGDPI and LGPRELEC are low and argues that those variables should therefore be dropped from the regression model. State the arguments for and against this.

Answer rating: 100% (QA)

11 The regression specification could be derived from a partial adjustment model as follows LGELEC L... View the full answer