The Phillips curve revisited again. Refer to Example 5.6 and Problem 5.29. It was shown that the percentage change in the index of hourly earnings and the unemployment rate from 1958-1969 followed the traditional Phillips curve model. The updated version of the data, from 1965-2007, can be found in Table 5-19 on the textbook's Web site.
a. Create a dummy variable to indicate a possible break in the data in 1982. In other words, create a dummy variable that equals 0 from 1965 to 1982, then set it equal to 1 for 1983 to 2007.
b. Using the inverted "percent unemployment rate"(l/X) variable created, create an interaction variable between (1/X) and the dummy variable from part (a).
c. Include both the dummy variable and the interaction term, along with (1 /X) on its own, in a regression to predict Y, the change in the hourly earnings index. What is your new model?
d. Which, if any, variables appear to be statistically significant?
e. Give a potential economic reason for this result.