Assignment Overview-

This assignment contains TWO questions. Two questions require you to perform data analysis using the EViews econometric software package. For these questions, you must undertake the analysis of specific variables which have been allocated to you on the basis of your student number. Please note that a penalty will be imposed if you do not perform the analysis for the specie variables allocated to you. Therefore, it is essential that you understand and comply with the allocation rules below. If you are unsure which variables you are required to use for these questions, do not hesitate to contact me as soon as possible.

Please note that you are required to include as much EVIEWS output as you feel is appropriate to fully answer the questions asked. If you are unsure about any element of this assignment or what is expected of you, please do not hesitate to contact me as soon as possible.

Question One-

Background information for Question One:

Question One requires use of the EViews ?le happymod.wf1 available from the Black-board site for MNB-333. This ?le contains the variables on happiness: itahap, spahap, ukhap and usahap. The data consists of annual observations of the measure of happiness for four countries (itahap: happiness measure for Italy; spahap: happiness measure for Spain; ukhap: happiness measure for United Kingdom; usahap: happiness measure for USA); and hapfra: happiness measure for France. Happiness is measured by over-all life-satisfaction for each country, which corresponds to the question: 'All things considered how satis?ed are you with your life as a whole these days'. The survey responses (the value of which ranges between 1 and 4) have been averaged for that particular year. The sample span is 1970-2007. For this question, you are required to consider one variable only according to the following allocation rule:

Theory: It is argued in the literature that like many macroeconomic time series, happiness of various countries may also experience long-run equilibrium relationships. The co-movement of cross-country happiness data implies that countries happiness processes are dynamically interdependent and a common socio-economic policy may help improve aggregate happiness in those countries both in the short and the long-run.

Tasks for Question One-

What is the motivation underlyingf Engle-Granger procedure for cointegration test? Provide a detailed and critical account of the this procedure. Illustrate your answer by applying the procedure to the particular pairing of series allocated to you in the Table above. Make sure that you undertake the following tasks while answering this question:

• For the particular pair of series allocated to you, how would you check that the regression of one on the other is spurious? What rule of thumb would you apply?

• Provide the critical and p-values associated with the appropriate hypothesis test of interest in the second stage of the Engle-Granger procedure.

• Use both 'observations based maximum lag length' and a user specified '6' lags and the implications of the cointegration results. For this analysis use both Schwarz Information and the Akaike Information Criterion for comparison.

- In the previous exercise you undertook a two-variable cointegration analysis. You are now required to extend your analysis for a three-variable case.

Please include the variable hapfra along with the (two) variables already allocated to you. Provide a detailed account of the Johansen cointegration procedure, illustrating your answer via the application of this procedure to your three variables. Note that for this analysis you must select option 3 with regard to the 'Deterministic trend assumption of the test' (that is, Intercept (no trend) and test VAR. For lag specification select 'Lag intervals' to ‘1 1'. Compare your results against an alternative lag interval by setting 'Lag intervals' to ‘1 2'.

Question Two-

Tasks for Question Two:

For this question you are required to read the article by Paul Soderlind and Anders Vredin (1996), "Applied Cointegration Analysis in the Mirror of Macroeconomic Theory, 1996, Journal of Applied Econometrics, vol. 11, 363-381. The article has been placed under the Assignment 2: cointegration folder.

• In no more than 300 words, provide a critical account of the cointegration analysis undertaken by the authors. In answering your question, you must emphasize on the usefulness of the theoretical models the authors are referring to for understanding cointegration analysis in macroeconomic time series.

• With respect to the critical analysis you will be undertaking, refer to Section 3.2 of the article and comment on the cointegration rank results presented in Table I. Your explanation should also accompany a brief analysis of Table II where the authors present simulation results for cointegration rank (r) = 2 for various lags.

Attachment:- happymod.rar