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Unformatted text preview: EXERCISE: Estimating the Relationship Between Aggregate Income and Consumption The purpose of this exercise is to show how one might model the relationship between two trended variables. The variables of the example are the quarterly data on aggregate consumption and disposable income in the U.K. for the period 1955Q11994Q4, which are recorded in the prices of 1990. There are altogether 160 observations. Data Preparation It is appropriate to take the logarithms of the data and then to remove the sea- sonal fluctuations. These operations can be performed by the IDEOLOG pro- gram. Either the WienerKolmogorov time-domain method or the frequency- domain method can be used. In either case, a linear function should be fitted to the logarithms of the data and the regression residuals should be saved in place of the trended data. The seasonal adjustment procedure is applied to the detrended residual sequence and, thereafter, the linear trend is added back to the resulting sequence to create the seasonally-adjusted version of the trended data.create the seasonally-adjusted version of the trended data....
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- Spring '12