Introductory Econometrics 4th Edition by Jeffrey Wooldridge

Exercise 17

In part (i) of Computer Exercise, you were asked to estimate the accelerator model for inventory investment. Test this equation for AR(1) serial correlation.
(ii) If you find evidence of serial correlation, reestimate the equation by Cochrane-Orcutt and compare the results.
Exercise Let invent be the real value inventories in the United States during year t, let GDPt denote real gross domestic roduct, and let r3t denote the (ex post) real interest rate on three-month T-bills. The ex post real interest rate is (approximately) r3t =i3t - inft, where i3t is the rate on three-month T-bills and inft is the annual inflation rate [see
Mankiw (1994, Section 6.4)]. The change in inventories, _invent, is the inventory investment for the year. The accelerator model of inventory investment is
where 0. [See, for example, Mankiw (1994), Chapter 17.]
(i) Use the data in INVEN.RAW to estimate the accelerator model. Report the results in the usual form and interpret the equation. Is statistically greater than zero
(ii) If the real interest rate rises, then the opportunity cost of holding inventories rises, and so an increase in the real interest rate should decrease inventories. Add the real interest rate to the accelerator model and discuss the results.
(iii) Does the level of the real interest rate work better than the first difference, r3t