Wooldridge_5e_Ch10_IM - CHAPTER 10 TEACHING NOTES Because...

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117 CHAPTER 10 TEACHING NOTES Because of its realism and its care in stating assumptions, this chapter puts a somewhat heavier burden on the instructor and student than traditional treatments of time series regression. Nevertheless, I think it is worth it. It is important that students learn that there are potential pitfalls inherent in using regression with time series data that are not present for cross-sectional applications. Trends, seasonality, and high persistence are ubiquitous in time series data. By this time, students should have a firm grasp of multiple regression mechanics and inference, and so you can focus on those features that make time series applications different from cross- sectional ones. I think it is useful to discuss static and finite distributed lag models at the same time, as these at least have a shot at satisfying the Gauss-Markov assumptions. Many interesting examples have distributed lag dynamics. In discussing the time series versions of the CLM assumptions, I rely mostly on intuition. The notion of strict exogeneity is easy to discuss in terms of feedback. It is also pretty apparent that, in many applications, there are likely to be some explanatory variables that are not strictly exogenous. What the student should know is that, to conclude that OLS is unbiased – as opposed to consistent – we need to assume a very strong form of exogeneity of the regressors. Chapter 11 shows that only contemporaneous exogeneity is needed for consistency. Although the text is careful in stating the assumptions, in class, after discussing strict exogeneity, I leave the conditioning on X implicit, especially when I discuss the no serial correlation assumption. As the absence of serial correlation is a new assumption I spend a fair amount of time on it. (I also discuss why we did not need it for random sampling.) Once the unbiasedness of OLS, the Gauss-Markov theorem, and the sampling distributions under the classical linear model assumptions have been covered – which can be done rather quickly – I focus on applications. Fortunately, the students already know about logarithms and dummy variables. I treat index numbers in this chapter because they arise in many time series examples. A novel feature of the text is the discussion of how to compute goodness-of-fit measures with a trending or seasonal dependent variable. While detrending or deseasonalizing y is hardly perfect (and does not work with integrated processes), it is better than simply reporting the very high R - squareds that often come with time series regressions with trending variables.
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