## Problem Set 3

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## Problem Set 3

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- Pages:
- 2
- School:
- Iowa State University
- Course:
- Econ 674 - Macroeconometrics

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Economics 674 Fall 2006 Project 3 Due Friday December 1 Let t denote the inflation rate in period t In the following problems use the same inflation rate data you used in Projects 1 and 2 and the sample period 1960 I 2006 I Report all pertinent results and accompany results with clear explanations and discussion 1 Base Model Fit the inflation rate to an AR p model where p is selected by applying the AIC with pmax 4 2 Test for Structural Change with an Unknown Breakpoint Test whether the parameters of the AR p model are constant over time by computing Quandt s Likelihood Ratio QLR statistic and comparing it to the appropriate limiting distribution provided in Andrews 1993 Set rmin 0 1and rmax 0 9 3 Fit the Inflation Rate to a Threshold Model Fit t to a two regime self exciting threshold model assuming that the threshold is equal to the inflation rate s sample mean Use the same p you selected for the base model Choose the delay parameter d to minimize the SSR 4 Testing for ARCH Effects Apply Engle s LM test to the residuals from the AR p model you fit in 1 to test the null hypothesis that the inflation rate is homoskedastic Choose the order of the AR regression for the squared residuals by applying the AIC with a maximum lag length of 4 5 Testing for a Unit Root Apply the ADF test to test the null hypothesis that there is a unit root in the inflation rate under each of the following assumptions i ii Under H0 the inflation rate is an I 1 process without drift Under H A the inflation rate is I 0 without any restriction on its mean Under H0 the inflation rate is an I 1 process with drift Under HA the inflation rate is trend stationary Use the same p you selected in 1 6 Cointegration Let it denote the nominal interest rate in period t Using the same interest rate data you used in Projects 1 and 2 and use the sample period 1960 I 2006 I Assume that t and it are I 1 processes i ii Test the null hypothesis that that the real interest rate is I 1 with no drift applying the

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