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

Exercise 21

Use CONSUMP.RAW for this exercise.

(i) Let yt be real per capita disposable income. Use the data through 1989 to estimate the model

yt = ? + ?t + ?yt-1 + ut

and report the results in the usual form.

(ii) Use the estimated equation from part (i) to forecast y in 1990. What is the forecast error?

(iii) Compute the mean absolute error of the one-step-ahead forecasts for the 1990s, using the parameters estimated in part (i).

(iv) Now, compute the MAE over the same period, but drop yt- 1 from the equation. Is it better to include yt- 1 in the model or not?