Use the data in BEVERIDGE.RAW to answer this question. The data set includes monthly observations on vacancy rates and unemployment rates for the U.S. from December 2000 through February 2012.
(i) Find the correlation between urate and urate _ l. Would you say the correlation points more toward a unit root process or a weakly dependent process?
(ii) Repeat part (i) but with the vacancy rate, vrate.
(iii) The Beveridge Curve relates the unemployment rate to the vacancy rate, with the simplest relationship being linear
uratet = β0 + β1 vratet + ut,
where β1 < 0 is expected. Estimate β0 and β1 by OLS and report the results in the usual form. Do you find a negative relationship?
(iv) Explain why you cannot trust the confidence interval for β1 reported by the OLS output in part (iii). [The tools needed to study regressions of this type are presented in Chapterl8.]
(v) If you difference urate and vrate before running the regression, how does the estimated slope coefficient compare with part (iii)? Is it statistically different from zero? [This example shows that differencing before running an OLS regression is not always a sensible strategy. But we cannot say more until Chapter 18.]