Economics 421/521

Winter 2006

Homework #5

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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 + β_{1}log(GNP_{i}) + β_{2}log(Pop_{i}) + β_{3}log(Unemp_{i}) + β_{4}log(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.