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1. Estimate the following models and compare the results and note the differences
a. Pooled Regression
b. Coefficients: In both pooled regression and maximum likelihood models, significant
coefficients, Unemployment has negative sign in both cases
c. T stats. All statistically significant
d. AR 1 and AR 2 (first and second lag correlation between residuals respectively)
H0= No auto correlation.
Test Value (p value > alpha) accept null. Null accepted means no auto correl. If null
rejected, there is auto correlation, but no need to worry because robust standard errors
used.
In case of pooled regression, there is no auto correlation, but in Maximum Likelihood
model, there exists AR1 and AR2 autocorrelation between residuals
e. OLS on differences
f. Coefficients: In both pooled regression and maximum likelihood models, unemployment
is significant while CPI is insignificant in OLS-differences and has a negative sign.
Unemployment has negative sign in both cases.
g. T stats. In OLS-diff CPI is statistically insignificant as t-value< 2 and p> 0.05 hence
accept Null Hypothesis (B(hat)=0) while Unemployment is statistically significant in
both cases/
h. AR 1 and AR 2 (first and second lag correlation between residuals respectively)
H0= No auto correlation.
Test Value (p value > alpha 0.05) accept null. Null accepted means no auto correl. If null
rejected, there is auto correlation, but no need to worry because robust standard errors
used.
In case of pooled regression, there is no auto correlation, but in Maximum Likelihood
model, there exists AR1 and AR2 autocorrelation between residuals
Test Value (p value > alpha) accept null. Null accepted means no auto correl. If null
rejected, there is auto correlation, but no need to worry because robust standard errors
used.
In case of pooled regression, there is no auto correlation, but in Maximum Likelihood
model, there exists AR1 and AR2 autocorrelation between residuals
2. Estimate the model with Maximum likelihood estimation and compare with the above
results.