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Problem Set 2 Questions

The document outlines Problem Set 2 for ECON 438 (Econometrics II) with a total of 6 questions, including 4 from Wooldridge and 2 additional questions focusing on forecasting Pakistan's CPI and analyzing the economic impact of climate change on the UK economy. The assignment requires the use of R for data analysis and includes specific tasks such as plotting, testing for stationarity, and fitting AR models, along with a regression analysis related to GDP and temperature. The deadline for submission is November 8, 2024, and solutions must be submitted in PDF and Stata file formats via LMS.

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21 views3 pages

Problem Set 2 Questions

The document outlines Problem Set 2 for ECON 438 (Econometrics II) with a total of 6 questions, including 4 from Wooldridge and 2 additional questions focusing on forecasting Pakistan's CPI and analyzing the economic impact of climate change on the UK economy. The assignment requires the use of R for data analysis and includes specific tasks such as plotting, testing for stationarity, and fitting AR models, along with a regression analysis related to GDP and temperature. The deadline for submission is November 8, 2024, and solutions must be submitted in PDF and Stata file formats via LMS.

Uploaded by

sheralam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ECON 438 (Econometrics II) – Problem Set 2

Fall 2024-25

Problem Set 2 (60 marks)


• There are a total of questions 6 questions in this problem set (4 from
Wooldridge + two questions given below)
• Deadline: 9 pm, Friday, Nov 08, 2024
• Submission instructions: Solutions (saved as a pdf) and Stata files (code and
log file) should be submitted on LMS in the Assignments tab
• Chapter 11 (Wooldridge)
o Problem 1 (2 marks)
o Problem 2 (8 marks)
o Problem 3 (8 marks)
o Problem 4 (2 marks)
• Two more questions given below:

Question 1 - Forecasting Pakistan’s CPI (25 marks)


Load annual data on Pakistan’s consumer price index (CPI) from FRED in R using the
pdfetch library:
https://fred.stlouisfed.org/series/DDOE01PKA086NWDB
a) Plot the CPI data using autoplot. Any comments? (2 marks)
b) Plot the autocorrelation function (ACF). Any comments? (2 marks)
c) Test for stationarity using the Augmented Dickey-Fuller (ADF) test. Comment
on the result. (2 marks)
d) Fit an AR(1) model on this CPI data. Comment on the results. (2 marks)
e) Now take the first-difference of this series and use autoplot to plot it against
time. Any comments (2 marks)
f) What about the ACF for this first-differenced series? (2 comments)
g) Repeat the ADF test for this first-differenced series. Comment on the results.
(2 marks)
h) Repeat the previous three parts (e-g) by differencing twice instead of once.
That is, take the second-order difference (also known as differencing twice)
and see how that series looks (autoplot, ACF, ADF test). Any comments.
Which of these three series (CPI, first-differenced CPI, twice-differenced CPI)
would you use for forecasting? Why? (6 marks)
i) Compute the 5-step ahead forecast for Pakistan’s CPI using the twice-
differenced series created above. Use an AR(1) model for forecasting. (2
marks)
j) Plot this 5-step ahead forecast with the previous 20 years included in your
graph. Plot the 10-step ahead forecast with the previous 30 years included.
Plot the 50-step ahead forecast with the previous 50 years included.
Comment on the results (specifically, what happens to the h-step ahead
forecast as the forecast horizon increases). (3 marks)

Question 2 given on next page.


Question 2 (15 marks)
Is climate change actually good for the economy?
Donald is convinced that a warmer globe is actually beneficial for the UK economy. He presents
the following plots, regression model, and results from an OLS estimation which relate the UK
GDP (gdpt ) measured in billions of £, and the land surface temperature (lstempt ) measured as
the deviation from the 1960-1991 average temperature, in degrees Celsius. He has data from 1948
to 2006.

gdpt = α + β lstempt + t
gdp
d = 551.85 + 582.90 lstempt
t
(21.00) (52.50)

(a) Assume that Donald’s proposed model is correct, interpret the estimate for β and evaluate
the hypothesis:
H0 : β = 0 versus HA 6= 0.

(b) Discuss whether these results deliver evidence to support Donald’s claim that the economy
benefits from a hotter climate.

(c) As a trained econometrician, propose an alternative model (using the same data) that
would be more suitable to investigate the relationship between national productivity and
global temperatures.

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