Suppose that a financial institution wishes to measure the relationship between the change in the interest rate in a given period ( it ) and the change in the inflation rate in the previous period ( INFt 1 ) Suppose that you gathered the data over the last 30 periods and the data are presented as follows Table 1 Data for selected macro economic variables Period (t) 1 2 3 4 5 6 7 8 9 10 i t ( ) 0 58 0 68 0 63 0 67 0 43 0 12 0 66 0 88 0 18 1 10 INF t 1 ( ) 0 90 0 81 1 15 0 16 0 67 0 11 0 87 0 45 0 02 1 38 Period (t) 11 12 13 14 15 16 17 18 19 20 i t ( ) 0 98 0 56 0 04 0 49 0 40 0 63 0 14 1 34 0 54 0 23 INF t 1 ( ) 1 18 0 74 0 28 0 64 0 47 0 81 0 05 1 55 0 50 0 23 Period (t) 21 22 23 24 25 26 27 28 29 30 i t ( ) 1 83 0 77 0 50 0 45 1 43 1 02 1 03 0 10 0 28 1 61 INF t 1 ( ) 2 12 1 21 1 02 0 17 1 84 1 36 1 25 0 08 0 08 1 77 REQUIRED Using Stata, generate descriptive statistics, scatter plot, run Pearson correlation test and discuss briefly your results Using the same sample, generate regression results Evaluate the regression results taking into account the previous two points with respect to its economic meaning, overall fit, and the signs and significance of the individual coefficients What conclusion do you draw about the overall relationship between the response and explanatory variables What econometric problems do these regressions have Why do you think that these problems arise Assume that last period's change in inflation was 2 , what would be the expected effect on the interest rate Does the numerical value appear reasonable What problems appear to exist in your finding Why Briefly discuss the following topics Explain why two perfectly multicollinear regressors cannot be included in a linear multiple regression Give two examples of a pair of perfectly multicollinear regressors While you were preparing your essay, your tutor mentioned to you a stochastic error term must be added to your econometric model Do you agree with him If yes or no explain briefly and concisely your reasons

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jun 20, 2024

Suppose that a financial institution wishes to measure the relationship between the change in the interest rate in a given period (it) and the change in the inflation rate in the previous period (INFt-1). Suppose that you gathered the data over the last 30 periods and the data are presented as follows:

Table 1: Data for selected macro-economic variables

REQUIRED:

Using Stata, generate descriptive statistics, scatter plot, run Pearson correlation test and discuss briefly your results.
Using the same sample, generate regression results. Evaluate the regression results taking into account the previous two points with respect to its economic meaning, overall fit, and the signs and significance of the individual coefficients.
What conclusion do you draw about the overall relationship between the response and explanatory variables?
What econometric problems do these regressions have? Why do you think that these problems arise?
Assume that last period's change in inflation was 2%, what would be the expected effect on the interest rate? Does the numerical value appear reasonable? What problems appear to exist in your finding? Why?

Explain why two perfectly multicollinear regressors cannot be included in a linear multiple regression. Give two examples of a pair of perfectly multicollinear regressors.
While you were preparing your essay, your tutor mentioned to you "a stochastic error term must be added to your econometric model". Do you agree with him? If yes or no - explain briefly and concisely your reasons.