Reference no: EM13262406

List of the topics:

1 Modelling consumption demand

2 Modelling money demand

3 Empirical analysis of the purchasing power parity hypothesis

4 Modelling house prices

5 Testing the Fisher effect

6 Terms structure of interest rates

7 Modelling inflation persistence

8 Last minute addition: are we really cheated at the pumps?

1. In order to test parameters, the model has to be stationary (all variables have to be transformed to stationarity)

2. Even if model is stationary, the non-normality of the residuals makes testing approximate, and not very reliable

3. Long-run (nonstationary) equations can be estimated, but testing is either impossible, or tricky)

4. The general algorithm is then:

a) Test for stationarity (Dickey-Fuller, etc.) If the variables are non-stationary, then:

Estimate long-run relationship and test for it (cointegration).

If it exist then:

Formulate, estimate and test a short-run model (with variables transformed to stationarity) with error correction (equilibrium correction) term. Check for the normality of the residuals and, if exists, formulate testing conclusions strongly; if it does not exist, with some caution.

If it does not exist:

Formulate, estimate and test a short-run model (with variables transformed to stationarity) without error correction (equilibrium correction) term. Check for the normality of the residuals and, if exists, formulate testing conclusions strongly; if it does not exist, with some caution.

Attachment:- Assignment.rar