ECONOMETRICS (ECON 479 TUTORIALS)
QUESTIONS:
1. What is meant by the Error Component Model (ECM)? How does it differ
from the FEM? When is the ECM appropriate? When is the FEM
appropriate?
2. Suppose a researcher is interested in examining the effects of household
income on their consumption expenditure using data obtained from 50
households over a period of 12 years.
i. Does this data type constitute a long panel or a short panel? Why?
ii. Discuss three challenges that he is likely to be confronted with in
choosing the Fixed Effect LSDV method of estimation for data
analysis purposes. Assuming he now decides to employ the Fixed
Effect WG method. Elaborate two shortcomings associated with this
method.
3. Consider the regression results 𝑌
𝑡 = 50.46 + 0.4Xt + 0.3Xt−1 + 0.2Xt−2 … (1)
Where Y is Consumption expenditure and X is household income
i. Will you define the above model as autoregressive or distributed lag?
Why?
ii. What is the short run MPC? Interpret?
iii. Derive and interpret the intermediate multiplier in the second period.
iv. Compute and interpret the long run multiplier.
v. What proportion of the total impacts of a change in household’s
income was first in the current period? In the third period?
4. Assuming that the regression (1) is modified as follows:
𝑌
𝑡 = 50.46 + 0.4Xt + 0.2Yt−1
Is the model now autoregressive or distributed lag? Why?
