Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 13

Use CONSUMP.RAW for this exercise. One version of the permanent income hypothesis (PIH) of consumption is that the growth in consumption is unpredictable. [Another version is that the change in consumption itself is unpredictable; see Mankiw (1994, Chapter 15) for discussion of the PIH.] Let be the growth in real per capita consumption (of nondurables and services). Then the PIH implies that where I_t-1 denotes information known at time (t ? 1); in this case, t denotes a year.

(i) Test the PIH by estimating Clearly state the null and alternative hypotheses. What do you conclude?

(ii) To the regression in part (i) add the variables gy_t?1, i3_t?1, and inf_t?1. Are these new variables individually or jointly significant at the 5% level? (Be sure to report the appropriate p-values.)

(iii) In the regression from part (ii), what happens to the p-value for the t statistic on gc_t?1? Does this mean the PIH hypothesis is now supported by the data?

(iv) In the regression from part(ii), what is the F statistic and its associated p-value for joint significance of the four explanatory variables? Does your conclusion about the PIH now agree with what you found in part (i)?

Step 1 of 7

(i)

Estimating the regression model:

In order to test for the significance of the coefficient, Wald test would be used.