You Have Collected Quarterly Data on Inflation and Unemployment Rates

Essay

You have collected quarterly data on inflation and unemployment rates for Canada from 1961:III to 1995:IV to estimate a VAR(4)model of the change in the rate of inflation and the unemployment rate.The results are t = 1.02 - .54 ΔInft-1 - .46 ΔInft-2 - .32 ΔInft-2 - .01 ΔInft-4
.09)(.09)(.09)(.08)(.44)
-.76 Unempt-1 + .20 Unempt-2 - .16 Unempt-3 + .59 Unempt-4
(.43)(.76)(.76)(.44) = .26. t = 0.18 - .003 ΔInft-1 - .016 ΔInft-2 - .018 ΔInft-3 - .010 ΔInft-4
(.10)(.016)(.018)(.017)(.016)
+ 1.47 Unempt-1 - .46 Unempt-2 - .08 Unempt-3 + .05 Unempt-4
(.08)(.14)(.14)(.08) = .980.
(a)Explain how you would use the above regressions to conduct one period ahead forecasts.
(b)Should you test for cointegration between the change in the inflation rate and the unemployment rate and,in the case of finding cointegration here,respecify the above model as a VECM?
(c)The Granger causality test yields the following F-statistics: 3.75 for the test that the coefficients on lagged unemployment rate in the change of inflation equation are all zero;and 0.36 for the test that the coefficients on lagged changes in the inflation rate are all zero.Based on these results,does unemployment Granger-cause inflation? Does inflation Granger-cause unemployment?