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Dean Fantazzini
University of Pavia
Overview of the Lecture
Variable Description
Y log of per capita real expenditure on gasoline and oil
X2 log of the real price index for gasoline and oil
X3 log of per capita real disposable personal income
Y = β0 + β1 · X2 + β2 · X3 + ε.
Since the first oil shock hit in 1973q4, we chose a sample period from
1959q1 to 1973q3, a period for which it might seem reasonable to postulate
parameter constancy.
⇒ Therefore, we use the first 51 observations for estimation (1959q1 -
1971q3), and the following 8 for the Chow Forecast test. Save it as eq p123.
e) Now estimate the same equation but with the full sample 1959q1 -
1973q3, save the equation as full sample and perform the Chow forecast
test as follows:
and insert the date 1971q4 as the breakpoint date. What do you get?
f) Use the same procedure for the Chow Breakpoint test. What do you get?
h) Follow the same procedure to get the Recursive Coefficients and the
CUSUM tests. Discuss.
i) Finally, compute the RESET test. What are the null and the alternative
hypothesis? Do you reject the null hypothesis?
Variable Description
lnwage log of wage
grade years of education
potexp years of experience
exp2 years of experience squared
union 0/1 dummy variable for membership in a union
where the estimation sample goes from 1 to 100. Save this equation as
eq p172 and compute the residuals series as
c) Has β̂1 , β̂2 , β̂3 β̂4 the sign you expected? Interpret.
e) To apply the Breusch-Pagan test, one must specify the variables that
one thinks influence the heteroskedasticity. We select grade, potexp and
union as possible candidates. We generate the squared residuals