You want to find out whether the log price of Money Supply (money_supply) is cointegrated with the log value of Inflation (inflation). You collected data for both variables, took the log values, performed ADF unit root tests on the individual series and used theEngle and Granger method to analyse potential cointegration. The results of the unit root tests for each series are presented below. You then estimated the following regression to obtain the residuals.

inflation = + *money_supply+ u_t

a)Do the levels of money_supply and inflation have a unit root, respectively? (Hint: you need to set up the test and the hypotheses) Given the results obtained through the regression output, what do you conclude? What does your answer imply in terms of the time behaviour of the respective variables?

b)Do the differences of d(money_supply) and d(inflation), have a unit root respectively? (Hint: you need to set up the test and the hypotheses) Given the results obtained through the regression output, what do you conclude?

c)Given the results in a) and b), what is the order of integration of money_supply and inflation, respectively? Do you need any more information to finally determine it?

d)Does the error term, ut, of equation (1) have a unit root? (Hint: you need to set up the test and the hypotheses) Given the results obtained through the regression output, what do you conclude?

e) Given the information from a) throughout d), what do you conclude? Is there cointegration? If yes, what could/should you do to model it? If not, what could/should you do to model it?