This coursework uses a data set from Stock and Watson’s ‘Introduction to Econometrics’ textbook. The two variables are a three-month interest rate (R90t) and a one-year interest rate (R1yrt). Use of the GRETL econometrics software is required. The data set is on the class MyPlace page. Using data for 1964Q1 to 1999Q4 throughout:
(a) Obtain time series plots of R90t, R90t, R1yrt, and R1yrt. Obtain plots of R90t against R1yrt and of R90t against R1yrt. Comment.
Consider the equation
ΔXt =α + ρXt−1 + γ1 ΔXt−1 + γ2 ΔXt−2 + γ3 ΔXt−3 + ut.
(b) Run the regression corresponding to (1) when Xt is R90t (the three month interest rate) and test H0 : ρ = 0 against Ha : ρ< 0 using appropriate Dickey-Fuller critical values.
(c) Repeat step (b) but for R1yrt (the one year interest rate).
(d) Repeat step (b) but for R90t − R1yrt.
(e) Discuss the implications of your estimations and your tests in parts (b),
(c), and (d).
(f) Estimate and discuss an ‘error correction mechanism’ type equation to describe ΔR90t, reporting tests for both (i) autocorrelation and (ii) parameter stability, as well as parameter estimates and standard errors.