Question: The consumption function used in Example 5.3 is a very simple specification. One might wonder if the meager specification of the model could help explain

The consumption function used in Example 5.3 is a very simple specification. One might wonder if the meager specification of the model could help explain the finding in the Hausman test. The data set used for the example is given in Table F5.1. Use these data to carry out the test in a more elaborate specification ct = β1 + β2yt + β3it + β4ct−1 + εt where ct is the log of real consumption, yt is the log of real disposable income, and it is the interest rate (90-day T bill rate).

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Results of the computations are shown below The Hausman statistic is 251 and the t statistic for the Wu test is 53 Both are larger than the table critical values by far so the hypothesis that least sq... View full answer

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