Use the data in APPROVAL to answer the following questions. 

(i) Estimate the equation

using first differencing and test the errors in the first-differenced (FD) equation for AR(1) serial correlation. In particular, let ê_t be the OLS residuals in the FD estimation and regress ê_t on ê_t–1; report the p-value of the test. What is the estimate of ρ?

(ii) Estimate the FD equation using Prais-Winsten. How does the estimate of β₂ compare with the OLS estimate on the FD equation? What about its statistical significance?

(iii) Return to estimating the FD equation by OLS. Now obtain the Newey-West standard errors using lags of one, four, and eight. Discuss the statistical significance of the estimate of β₂ using each of the three standard errors.

Transcribed Image Text:

approve, = Bo + Bilcpifood, + Balrgasprice, + Bzunemploy, + Basep11, + Bsiraqinvade, + u,