You want to learn about disposable income and and perdictions of consumption. Yo

Question

You want to learn about disposable income and and perdictions of consumption.

You have data for a sample period of 1962:I to 1995:IV

a) To look at if past values perdict future values you estimate the following relationship:

b) You are surpised by the lag length in the ADP(p,q) model. So you created the below table:

Which values of p and q should you choose?

c) Using ADL(1,1) you get a t stat of 1.28 on lagged disposable income. What does rthe granger causality test suggest about the inclusion of lagged income growth as a predictor of consumption growth?

Explanation / Answer

Solution a:The Granger causality test for the exclusion on all four lags of the GDP growth rate is 0.98.

So,the critical value for F4, is 3.32, 2.37, and 1.94 respectively.Hence it is the decision to not reject the null hypothesis at the 1% significance level.

Solution b:I would choose the value the value of both p and q at 1 i.e BIC -5.052 & AIC- 4..988 as the minimum for both the AIC and the BIC is at p=q=1.

Solution c:Using ADL(1,1) you get a t stat of 1.28 on lagged disposable income,granger causality test suggest about the inclusion of lagged income growth as a predictor of consumption growth that for a single restriction, t=F2 and the critical value is therefore 1.96 for the t-statistic. So it is not possible to reject the null hypothesis that the coefficient on lagged disposable income growth is zero, or that disposable income growth does not Granger cause consumption growth.

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