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Suppose you are interested in predicting the three-month government bond rate based on factors listed in the excel file intdef.xls. The definition of the variables

Suppose you are interested in predicting the three-month government bond rate based on factors listed in the excel file intdef.xls.

The definition of the variables of interest is presented in the table below:

Variable

Definition / Unit

I3

three-month government bond rate.

inf

inflation rate based on the consumer price index.

def

government budget deficit as a percentage of the GDP.

Consider the following model:

I3t = B0 + B1inft +B2deft +ut

10. Assume serial autocorrelation is established, what are two possibilities you might do to correct for this violation of OLS assumptions?(2 marks)

11. Write down the null and the alternative hypothesis to test the normality assumption.(2 marks)

12. Conduct Bera_Jarque test to test the hypothesis stated in part 11.(3 marks)

13. Assume that normality is violated, what are two possibilities you might do to correct for this violation of OLS assumptions? (2 marks)

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