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

Exercise 23

Use the data in APPROVAL to answer the following questions. See also Computer Exercise C14 in Chapter 11.

(i) Estimate the equation

using first differencing and test the errors in the first-differenced (FD) equation for AR(1) serial correlation. In particular, let  be the OLS residuals in the FD estimation and regress  on ; report the p-value of the test. What is the estimate of ??

(ii) Estimate the FD equation using Prais-Winsten. How does the estimate of ?₂ compare with the OLS estimate on the FD equation? What about its statistical significance?

(iii) Return to estimating the FD equation by OLS. Now obtain the Newey-West standard errors using lags of one, four, and eight. Discuss the statistical significance of the estimate of b2 using each of the three standard errors.