Solution to Homework 8

1. [Practice problem] (a) After the data have been read in:

Do OLS on

COt = β₀ + β₁YD_t + β₂CO_t-1 + ε_1t

by running

with the result

Next, do OLS on

I_t = β₃ + β₄Y_t + β₅r_t-1 + ε_2t

by running

with the result

(b) Use 2SLS to estimate

COt = β₀ + β₁YD_t + β₂CO_t-1 + ε_1t

by running

with the result

Next, use 2SLS to estimate

I_t = β₃ + β₄Y_t + β₅r_t-1 + ε_2t

by running

with the result