ECS4863 Assignment 1 (COMPLETE ANSWERS) 2025 - DUE 16 May 2025

Question 1: (15 marks) 1.1 Explain the concept of omitted variable bias and distinguish between positive and negative bias (4) 1.2 Explain in your own words how you test serial correlation with strictly exogenous variables (3) 1.3 Explain, in your own words, the concept of heteroscedasticity and implications for inferences in econometrics (4) 1.4 Explain in your own words what is meant by the following: (4) a) Covariance stationary process b) Sequential exogeneity Question 2: (5 marks) In this question you need to gather and analyze time series data for a country (other than South Africa!) (5) 1. Select any country which starts with the same letter as your surname (if you cannot find one, use the first letter of your name) 2. Now choose any macroeconomic variable from that country (e.g. inflation, GDP, imports/exports, etc.) 3. Data source: you can use any data source (e.g. World Bank, IMF, country specific central banks, etc.) Your time series must have at least 60 observations. You may use any interval, (e.g. quarterly, monthly) It can be nominal or real data. Open Rubric Make sure to provide (at least) the following: - Your surname (or name) - The name of the country and time series you chose. - A graph of the data - A stationarity test and interpretation Question 3: (55 marks) In this question, you must estimate a time series model for consumer prices in South Africa using data in the Excel file ECS . You are provided with the following data: Variable names and descriptions: SA_CPI = South African headline consumer price index (all urban areas) EXCH= South African rand per euro Rand = South African rand per US dollar OIL = Brent crude oil in South African rand per barrel M3 = South African money supply in million rands EU_CPI = Euro area Harmonised consumer price index US_CPI = United States of America consumer price index NB, Log transform all the variables. ‘L’ indicates the logarithmic function is used. 3.1 Use the data to calculate the annual consumer price inflation and annual South Africa per Euro exchange rate growth. [ N.B Calculate the month-on-same-month of the previous year (i.e. 12 months) inflation and growth rate]. Plot both series in a scatterplot and comment on the relationship. Perform the Ganger causality test and interpret the results. Find the correlation coefficient between the series and determine if it is statistically significant (6) 3.2 Test the variables LOIL, LEXCH, and LEU_CPI for stationarity (transform all applicable variables). Also comment on their respective orders of integration. Provide your results in the table below (please add rows where necessary): (9) Variable Model Lags ADF test statistic Conclusion LOIL Trend & Intercept Intercept None LEU_CPI Trend &Intercept Intercept None LEXCH Trend & Intercept Intercept None Statistically significant at the: 10% level (*), 5% level (**), 1% level (***) You can assume that all other variables are non-stationary, integrated of order I(1). 3.3 Test for possible cointegration between variables: (i) Estimate the following long-run cointegration equation using OLS. Copy and paste your EViews results window in your answer sheet. (1)