Fox Module 20: Collinearity
(The attached PDF file has better formatting.)
Homework assignment: Interest rates and inflation
Financial economists often model nominal interest rates as expected inflation plus the real interest rate plus an error term.
Real interest rates are relatively steady over time.
Expected inflation is often modeled as actual inflation in the previous period.
The error term is both random fluctuation and changes in monetary policy.
A statistician has monthly data for interest rates, wage inflation, and general inflation.
A. What is the estimated â for a regression of interest rates on general inflation?
B. What is the standard error of the â coefficient?
C. What is the estimated â for a regression of interest rates on wage inflation?
D. What is the standard error of the â coefficient?
E. What are the estimated â s for a regression of interest rates on both inflation rates?
F. What is the correlation of wage inflation with general inflation?
G. What are the standard errors of the â coefficients?