Question: Update the data set on U.S. production and consumption. Following the reasoning of an economist, the cointegrating relation should be log Yt, = 0 +

Update the data set on U.S. production and consumption. Following the reasoning of an economist, the cointegrating relation should be log Yt, = α0 + logCt+ zt. How would you confirm that this in fact is a cointegrating equation? What is the disequilibrium error? Is it stationary? If it is, find the best vector error correction model. Construct the 1-year-ahead forecast for production and consumption.

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Figure 1 shows the time series plots of both series Observe that both series have an upward trend therefore we run the unit root test to decide the na... View full answer

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