Consider the following model of the Philips curve. In this model inflation is regressed upon unemployment using a sample of 56 observations, where INF denotes a measure of the inflation rate and UNEM denotes a measure of the unemployment rate. An initial analysis of this model produced the results reported in Tables Two and Three. Table Two Dependent Varabe INF Method Least Squares Sample: 1948 2003 Included observaions: 56 Coeficiere Sd. Eror 1Statistie Prob. Variable 1.0535es 1.547967 0680617 04900 0.502378 0265562 UNEM 1.891752 00639 Akake info crterion sos1084 Schwarz criterion S.123418 Table Three Breusch-Godtrey Seria Correlation LM Test Fatatste Obs'Raguared 31.52807 Prob. F(1.3) 0.0000

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Consider the following model of the Philips curve. In this model inflation is regressed
upon unemployment using a sample of 56 observations, where INF denotes a
measure of the inflation rate and UNEM denotes a measure of the unemployment rate.
An initial analysis of this model produced the results reported in Tables Two and Three.
Table Two
Dependent Variable: INF
Method: Least Squares
Sample: 1948 2003
Included observations: 56
Coeficient Sid. Emor -Statistic Prob.
Variable
UNEM
1.053565 1.547957 0.680617 0.4990
0.502378 0.265562 1.891752 00639
Schwarz criterion 5.123418
Akaike info criterion 5051084
Table Three
Breusch-Godtrey Serial Correlation LM Test
Fatatistic
Obs'R-squared
31.52897 Prob. F(1,53)
20.88778 Prob. Chi-Square(1)
0.0000
0.0000
Further analysis produced the results in Tables Four and Five.
Table Four
Dependent Variable: INF
Method: Least Squares
Sample (aqusted) 1950 2003
Included observations: 54 afer adjustments
Variable
Coefficient Sid. Emor
-Statistie
Prob.
INF(-1)
UNEM
UNEM-1)
UNEM-2)
1.409011
0833123
0.421441
0203712
1.139049 1.236820
0.104146 7.900534
0.314574 1.339722
0.350092
0.2220
0.0000
0.1865
0.5731
0.0565
0.567296
0.504038
0258068
1.953120
Akake info criterion 4.178055
Schwarz oriterion 4362220
Table Five
Breusch-Godtey Serial Correlation LM Test
Fatatstie
Obs"R-aquared
2325230 Prob. F(1,48)
2495029 Prob. Ch-Square(1)
0.1330
0.1142
c) Compare the two models presented in Tables Two and Four on the basis of the calculated
values of the information criteria considered. Using appropriate justification, explain which
model you prefer.
d) A new ARDL (2,3) model of INF is estimated, with no serial autocorrelation detected
for this model. The calculated values of the Schwarz Information Criterion and Akaike
Information criterion for this model are given as:
The Schwarz Information Criterion = 4.443694
The Akaike Information Criterion = 4.183467
Compare this model with those presented in Tables Two and Four. Which of the three
models do you prefer? Explain your answer.
Transcribed Image Text:Consider the following model of the Philips curve. In this model inflation is regressed upon unemployment using a sample of 56 observations, where INF denotes a measure of the inflation rate and UNEM denotes a measure of the unemployment rate. An initial analysis of this model produced the results reported in Tables Two and Three. Table Two Dependent Variable: INF Method: Least Squares Sample: 1948 2003 Included observations: 56 Coeficient Sid. Emor -Statistic Prob. Variable UNEM 1.053565 1.547957 0.680617 0.4990 0.502378 0.265562 1.891752 00639 Schwarz criterion 5.123418 Akaike info criterion 5051084 Table Three Breusch-Godtrey Serial Correlation LM Test Fatatistic Obs'R-squared 31.52897 Prob. F(1,53) 20.88778 Prob. Chi-Square(1) 0.0000 0.0000 Further analysis produced the results in Tables Four and Five. Table Four Dependent Variable: INF Method: Least Squares Sample (aqusted) 1950 2003 Included observations: 54 afer adjustments Variable Coefficient Sid. Emor -Statistie Prob. INF(-1) UNEM UNEM-1) UNEM-2) 1.409011 0833123 0.421441 0203712 1.139049 1.236820 0.104146 7.900534 0.314574 1.339722 0.350092 0.2220 0.0000 0.1865 0.5731 0.0565 0.567296 0.504038 0258068 1.953120 Akake info criterion 4.178055 Schwarz oriterion 4362220 Table Five Breusch-Godtey Serial Correlation LM Test Fatatstie Obs"R-aquared 2325230 Prob. F(1,48) 2495029 Prob. Ch-Square(1) 0.1330 0.1142 c) Compare the two models presented in Tables Two and Four on the basis of the calculated values of the information criteria considered. Using appropriate justification, explain which model you prefer. d) A new ARDL (2,3) model of INF is estimated, with no serial autocorrelation detected for this model. The calculated values of the Schwarz Information Criterion and Akaike Information criterion for this model are given as: The Schwarz Information Criterion = 4.443694 The Akaike Information Criterion = 4.183467 Compare this model with those presented in Tables Two and Four. Which of the three models do you prefer? Explain your answer.
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