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Dr. Marc Piopiunik Andreas Kammerlander Intermediate Econometrics

SoSe 2018

PC Exercise Session Problem Set 3 This exercise session is an introduction to working with R and gives an overview of basic commands that you need for a simple regression analysis.

General remarks on working with R: • The program R and the feature R-Studio can be obtained under: https://www.r-project.org/ and https://www.rstudio.com/ • R is the basic program and R-Studio is an intuitive user interface for R that will be used in this course. • All related files (datasets) can be obtained from the course’s page on ILIAS.

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1.) Getting started with R: Data Preparation For the first exercise, we will use a macroeconomic data set consisting of three variables from the national accounts of the DIW (German Institute for Economic Research). This quarterly data from 1960/I to 1994/IV is for West Germany only. The variables are: CON: YV: P:

private consumption in current prices (bn DM) disposable income of private households in current prices (bn DM) price index of private consumption (1991=100)

(a) Start R-Studio and open the script-file “Exercise Session 3 - Problem 1 + 2.r”. Read in the data file “consum.xls” and display the data. (b) Display the descriptive statistics of the three variables. Display the mean, standard deviation, minimum and maximum. (c) Display the descriptive statistics again, but only for the first ten years (i.e. the time period 1960/I-1969/IV). (d) Return to using the full sample. Then generate the following variables: • CON R: real consumption in prices of 1991 = (CON/P ) ∗ 100 • YV R: real disposable income (e) During how many periods has real consumption been lower than 150 bn DM? (f) Plot the two variables CON R and YV R. (g) Create a plot placing the real disposable income on the x-axis and real consumption on the y-axis.

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2.) Estimation of a Keynesian consumption function The Keynesian consumption function is theoretically specified as: C = C¯ + c · Y with: C C¯ c Y

real consumption “autonomous consumption” marginal rate of consumption real income

Replacing the theoretical variables C and Y by the variables from our data set CON Rt and Y V Rt and adding an error term ut leads us to the corresponding econometric model: CON Rt = β1 + β2 · Y V Rt + ut (a) Estimate such a model by applying the method of ordinary least squares (OLS). (b) How large is the estimated autonomous consumption? Is the coefficient statistically different from zero? (c) How large is the estimated marginal rate of consumption? Is it statistically different from zero? (d) What does the estimated consumption function look like in a (Y V Rt , CON Rt )-diagram? Create a plot placing the real disposable income on the x-axis and real consumption and the estimated consumption function on the y-axis.

3.) Job Training Partnership Act The data in “jtrain2.dta” come from a job training experiment conducted for low-income men during 1976-1977; see LaLonde (1986). (a) Use the indicator variable train to determine the fraction of men receiving job training. (b) The variable re78 is earnings from 1978, measured in thousands of 1982 dollars. Find the averages of re78 for the sample of men receiving job training and the sample not receiving job training. Is the difference economically large? (c) The variable unem78 is an indicator of whether a man is unemployed or not in 1978. What fraction of the men who received job training are unemployed? What about for men who did not receive job training? Comment on the difference. (d) From parts (b) and (c), does it appear that the job training program was effective? What would make our concluision more convincing? (Based on WO, Computer Exercise C2.4, p. 18)

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