Use CONSUMP.RAW for this exercise.
(i) Let yt be real per capita disposable income. Use the data through 1989 to estimate the model
yt = α + βt + pyt-1 + ut
and report the results in the usual form.
(ii) Use the estimated equation from part (i) to forecast y in 1990. What is the forecast error?
(iii) Compute the mean absolute error of the one-step-ahead forecasts for the 1990s, using the parameters estimated in part (i).
(iv) Now, compute the MAE over the same period, but drop yt-1, from the equation. Is it better to include yt-1, in the model or not?