The Australian National University Research School of Economics Economic Models and Introductory Econometrics (EMET8005) Semester 1, 2012

Assignment 2 Submit by 4:30 pm, 17 May 2012, in the box assigned to EMET8005 outside the Research School of Economics office on the first floor of Arndt building. All hypothesis tests should be performed at the 5% level of significance, and in each case, the null and the alternative hypotheses as well as the test statistic and its distribution under the null must be clearly stated for full marks. Please attach your estimation output to your assignment. Other requirements for assignments were given in the course outline. Question 1. Text, Q6.13, parts a, b, c, d. Also: In part c, estimate a probit model and compare the estimates with those from the logit model. You need not perform the LM test for heteroskedasticity, and the LR test is discussed below. Do part f, except use the logit and probit models. Consider heteroskedasticity of the form i2 = 2zi for some observed variable zi. o o Using the latent variable approach, with normal errors, find the expression for P(yi = 1). What is an identification condition in the model (see p 441 of the text)? With the condition you use, are the parameters comparable to the parameters in the probit model without heteroskedasticity? Estimate the probit model with zi = education and compare the results with those from the probit model without heteroskedasticity. i2 = exp(zi) where zi = education. o o Explain why the restriction = 0 gets you back to the usual probit model. Estimate the model by MLE and test for heteroskedasticity. The following EViews command might be useful (the _ at the end of the first line is the continuation command):

Consider heteroskedasticity of the form given in the question,

equation e3.probit y = c(1)/exp(c(5)*educ) + c(2)*educ/exp(c(5)*educ) + _ c(3)*minority/exp(c(5)*educ) + c(4)*prevexp/exp(c(5)*educ)

Question 2. Text, question 5.33 Question 3. Consider the simplified version of the Klein model

Ct = 1 + 2 Yt + 3 t + t Yt = Ct + It + Gt where C is consumption, I is investment and G is government spending. I and G are assumed to be exogenous. a) Find the correlation between Y and in the consumption equation. b) The reduced form (RF) of the system is the set of equations with endogenous variables on the LHSs and only exogenous variables on the RHSs. Find the RF equation for C. That is, in the following equation, find the expressions for the s in terms of the s: Ct = 1 + 2 It + 3 Gt + 4 t + vt c) Argue why you can consistently estimate the parameters in the RF equation for C. d) Explain how you can recover estimates of the s from estimates of the s. e) How does part d) change if I is dropped from the model?