Under adaptive expectations, there are two alternative versions of the linear expectations augmented Philips curve (EAPC):...

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Under adaptive expectations, there are two alternative versions of the linear expectations augmented Philips curve (EAPC): Model (a): AINF = Bo + B1UNEMP + et Model(b): AINF, = Yo + Y1AUNEMP + vt Version (a) relates the change in unanticipated inflation ( AINF,) to the level of unemployment (UNEMP,) and a supply shock (e,); the model also implies that the natural rate of unemployment (also known as the non-accelerating inflation rate of unemployment or NAIRU) is constant. Version (b) allows the natural rate of unemployment to depend on past levels of unemployment and therefore yields a Philips curve where inflation and unemployment are in first differences. Note the dependent variables are the same in the two models. Empirical estimates for New Zealand using data for the 1960-2013 periods are: Estimate of Model (a): AINF, = 0.6354- 0.1854UNEMP, (0.5979) (0.1252) std error n = 52; R2 = 0.0420; Adj R2 = 0.0229 Estimate of Model (b): AINF, = 0.1577 – 1.6812UNEMP, (0.3484) (0.4468) std error n = 52; R? = 0.2206; Adj R? = 0.2051 i) Interpret the slope coefficients from the two empirical models. i) When there is no change in unanticipated inflation (i.e., AINF, =0), what is the level of unemployment in Model (a) and what is the change in unemployment in Model (b)? Comment on the meanings of these two values. i) Which model fits the data better? Explain. Under adaptive expectations, there are two alternative versions of the linear expectations augmented Philips curve (EAPC): Model (a): AINF = Bo + B1UNEMP + et Model(b): AINF, = Yo + Y1AUNEMP + vt Version (a) relates the change in unanticipated inflation ( AINF,) to the level of unemployment (UNEMP,) and a supply shock (e,); the model also implies that the natural rate of unemployment (also known as the non-accelerating inflation rate of unemployment or NAIRU) is constant. Version (b) allows the natural rate of unemployment to depend on past levels of unemployment and therefore yields a Philips curve where inflation and unemployment are in first differences. Note the dependent variables are the same in the two models. Empirical estimates for New Zealand using data for the 1960-2013 periods are: Estimate of Model (a): AINF, = 0.6354- 0.1854UNEMP, (0.5979) (0.1252) std error n = 52; R2 = 0.0420; Adj R2 = 0.0229 Estimate of Model (b): AINF, = 0.1577 – 1.6812UNEMP, (0.3484) (0.4468) std error n = 52; R? = 0.2206; Adj R? = 0.2051 i) Interpret the slope coefficients from the two empirical models. i) When there is no change in unanticipated inflation (i.e., AINF, =0), what is the level of unemployment in Model (a) and what is the change in unemployment in Model (b)? Comment on the meanings of these two values. i) Which model fits the data better? Explain.