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# Paul A. Johnson Economics 210 Second Applied Project Your completed projects are due at my office no later than 5 PM on Monday, May 17, 2010. Your...

paul johnson econometrics applied project 2
(d) Using OLS, estimate the parameters of equation (1). Report your results in the usual way. Does your estimate of have the expected sign? State and interpret the of the regression. Test ) V # the hypothesis that . ) œ! (e) The variables are, respectively, real government spending (i.e. purchases of goods gs pop >> and and services) and an indicator variable that is one if the sitting President was a Democrat and zero otherwise. Explain why might be suitable gsgro 100 gs gs pop >> > " > [ (log log )] and œ‚ instruments for . ? C > (f) Explain why for might also be suitable instruments for . ?? C3   " C >3 > (g) Estimate the “first-stage” regression of on and Comment on ?? ? CC C >> > gsgro , pop , >> 12 the results. (h) Perform a Hausman-Wu test for the endogeneity of in the model in part (d) using the ? C > instruments and . gsgro , pop , >> ?? CC > > 12 (i) Using 2SLS, with and as instruments, estimate the parameters of gsgro , pop , >> ?? CC > > 12 equation (1). Report your results in the usual way. Compare them to the results in part (d). Does your estimate of have the expected sign? Test the hypothesis that . )) œ! (j) Is there any evidence of heteroskedasticity in the error term in the model estimated in part (i)? (k) Test for the presence of up to fourth-order serial correlation of the error term in the model estimated in part (i). Do this in two ways, one that assumes a homoskedastic error term and another that is robust to violations of that assumption. (l) Perform a test of the hypothesis that is robust to violations of both the assumption of ) œ! homoskedasticity and that of no autocorrelation of the error term in the model estimated in part (i). (m) Perform a Sargan test of instrument validity for the model estimated in part (i). (n) There have been claims that the response of to changes in the growth rate of GDP ? ? > real (i.e. ) is asymmetric with rising more quickly in recessions than it falls in expansions. Test ? C >> ? this hypothesis by examining or not the response of to is larger (in absolute whether ?? ? >> C value) when is negative that when is positive. HINT: An indicator variable might help. ?? CC >> (o) After thoroughly checking the veracity of the assumptions required to make the test that you used in part (n) statistically meaningful, comment on the veracity of the claim that the response of ?? ? >> to changes is asymmetric. C

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