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Time Series Assignment 2 Question 1 The data file cons

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Time Series
Assignment 2

Question 1
The data file cons.dta contains quarterly data on the log of real personal disposable income (Y) and the log of real personal consumption expenditure (C) for the US economy over the period 1960:1 to 2009:4.
a. For each series, decide whether it has a unit root or not. Use a formal test.
b. Regardless of the result in part a, assume now that both series have unit roots. Estimate the simple Keynesian consumption function (log consumption is a function of log income). What is the implication of non-stationarity of the series for the results of the regression?
c. Now estimate a DL version of the function. Use OLS and HAC corrected standard errors. Be clear about why you choose the particular number of lags in the regression.
d. Explain in words what are the economic implications of the coefficients
e. Calculate the long run marginal effect of log income on log consumption. Test the hypothesis that this is equal 1.
f. In your opinion, does the model meet the requirements of the DL model in term of the exogeneity of the regressors?