Homework 5

Economics 421/521
Winter 2006
Homework #5
[PDF version]

1. Suppose you want to know the determinants of new housing starts and you decide to estimate the following equation using the housing.xls data set:

log(Housing_i) = α + β₁log(GNP_i) + β₂log(Pop_i) + β₃log(Unemp_i) + β₄log(Intrate_i) + ε_i

where, Housing_i = total new housing starts, GNP_i = gross national product, Pop_i = population, Unemp_i = the average annual unemployment rate, and Intrate_i = the average annual new mortgage rates.

a) Is there any reason to suspect multicollinearity?
b) Run your regression. What signs of multicollinearity do you detect?
c) Describe how the multicollinearity might be overcome.

2. Problem 10-27 on page 382.

3. Using the consumption.xls data set containing quarterly data from 1974Q1 – 2002Q4 for South Korea, consider the following equation:

C_t = α + βY_t + u_t

where C = Real consumption and Y = Real income.

(a) Estimate the equation.
(b) Test this model for heteroskedasticity using the Park’s test.
(c) Test this model for heteroskedasticity using White’s test.
(d) Using feasible GLS (also called WLS) to correct for the heteroskedasticity.

4. Question 11.2 , parts a, b, and c.