Dougherty: Introduction to Econometrics 4e

Manual for doing the computer exercises in Dougherty, C. Introduction to Econometrics (Oxford: Oxford University Press, fourth edition 2011) using

gretl

gretl

gretl (GNU Regression, Econometrics and Time-Series Library) is the official econometrics application for Christopher Dougherts University of London module 20 Elements of Econometrics. It is free (obviously, a major consideration for distance learning students) and very powerful. It does everything that is required in the computer regression exercises in the course text Introduction to Econometrics (C. Dougherty, Oxford University Press, fourth edition 2011). In fact, we use only a small fraction of its features. It is similar to major econometrics applications such as Stata, EViews, SPSS, and SAS, with the crucial difference that you do not have to pay for it. If you already have access to one of the commercial applications just mentioned, there is no need to change. However, if you are struggling to run regressions with a regression feature built into a spreadsheet application such as Microsoft Excel, quit now and switch to gretl. Spreadsheet applications can do only very basic regressions and are quite unsuitable for this course. gretl should be downloaded from the its home page http://gretl.sourceforge.net/ See that page for its history and current status. This manual provides just the information needed to undertake the regression exercises in the text. The information is provided as you need it, so that you are not overwhelmed by too much information too soon. By the time that you have completed the exercises, you will have a good basic working knowledge of the application. Comprehensive reference information can be found in the gretl manual gretl-guide.pdf located in the Help section of gretl. The Help section also provides direct access to information about the commands and functions used by gretl. It is assumed that you have downloaded and installed gretl and that you have downloaded the necessary data sets from the LSE website or from the OUP site at www.oup.com/uk/orc/dougherty4e (The OUP link is likely to appear if you type Dougherty 4e into your search engine.)

GUI/CLI/Batch mode

In common with other sophisticated econometrics packages, gretl may be operated in three ways: via a graphical user interface (GUI), via a command line interface (CLI), and in batch mode. The GUI involves menus and windows, is intuitively designed, and provides an excellent starting point for experimenting with gretl. However, it will mostly be ignored here, for two reasons. One, the less important, is that operations with menus and windows can be cumbersome to describe. The other is that serious researchers always primarily use batch mode. The CLI involves using a special command line window, called the command console in the gretl manual, instead of the GUI. The command line window may be opened by clicking on the Tools tab in the main menu and then Gretl console. Operations, such as opening a

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Dougherty: Introduction to Econometrics 4e

data file or running a regression, are effected by typing in a line of text into this window and then pressing the Enter key. Batch mode is essentially a well-organized use of the CLI. Instead of entering the commands one by one, they are all written together, line by line, in a text file with extension .inp. The text file is then run by gretl, the commands in it being executed sequentially. Batch mode has huge advantages over the interactive use of the GUI or the CLI: You have an exact and permanent record of your operations If you make a mistake somewhere in your operations, all you have to do is to correct the faulty line in the batch file rather than repeat all your pointing and clicking, and If at some future time you wish to modify the analysis or develop it further, you do not have to start from scratch. You modify the existing batch file or create a new one using it as a base. This is how research is done. There is a further small advantage of batch mode over the GUI. If you are skilled at word processing, you may actually find it quicker to use a batch file than the GUI. Note that gretl calls batch files script files. To run one, you launch gretl, go to Files/Script files/User files and then browse to the location of your file. Double click on its name and a window listing its contents will open. To run the commands, click the cogs icon in the menu of this window. Since the exercises in the text are relatively simple, each involving only a few commands, the instructions in this manual assume that you use the CLI directly. Indeed, if you prefer, you could use the GUI. However the explanation here is in terms of using the CLI because I can describe exactly what you need to do for each of the exercises that you are going to undertake. Short of leaving out a space where there should be one, or using a number 1 instead of a letter l, you should not be able to make mistakes.

Common operations

Here are a few commands that will be useful in the exercises: You will learn other commands as you work your way through the exercises. In fact, doing the exercises is a relatively painless way of acquiring a basic understanding of how to use gretl. ols followed by a variable name, then const, and further variable names. The first variable is regressed on the rest. Omit const if there is no intercept in the model.

summary followed by a list of variable names. This produces a table giving the mean, maximum, minimum, and standard deviation of each variable listed. corr genr followed by a list of variables. The correlation coefficients are calculated. followed by an equation. This creates a new variable defined as the dependent variable of the equation.

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Manual for the computer exercises

smpl

followed by a condition in parentheses. This restricts the observations to the subset that satisfy the condition. smpl is cumulative, so that a second use of it will select a subset of the subset selected by its first use. The command smpl full must be used to return to the full sample.

Examples of the use of these commands, and a few others, will be found in the following list of exercises. Exercise 1.6 Opening a data file, running a simple regression, and saving and printing the output

Exercise 3.14 Using the corr command for computing correlation coefficients Exercise 3.15 Creating new variables from existing ones Exercise 4.4 Exercise 4.4 Limiting the sample to those observations that satisfy some condition Creating a new variable as a function of an existing one. See Help/Function reference from the gretl main menu for a complete list of available functions. Saving a data file after defining new variables (overwriting the existing file).

Exercise 4.9

Exercise 5.19 Restoring the full sample Exercise 5.21 Using a backslash in a batch file to extend a long command that has wrapped to a second line. Exercise 7.3 Sorting a data set

Exercise 8.10 Instrumental variables (IV) regression and Hausman test Exercise 10.4 Defining a dummy variable using a condition Exercise 10.4 logit regression Exercise 10.6 probit regression Exercise 10.9 tobit regression Exercise 10.11 heckit (sample selection) regression Exercise 11.2 Plotting a time series Exercise 11.7 Creating lagged versions of existing variables Exercise 13.9 Creating first differences of variables using the diff command Exercise 13.9 Testing for a unit root (augmented DickeyFuller test) with the adf command Exercise 14.2 Testing for the presence of fixed effects with an F test Exercise 14.6 Testing for the presence of random effects with a BreuschPagan test Exercise 14.6 Discriminating between fixed effects and random effects using a Hausman test

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Exercise 1.6 (EAEF)

Opening a data set
This involves using one of the EAEF data sets described in detail in Appendix B of the text. There are 20 for the use of students working together with an instructor. The students should use different data sets and therefore get slightly different results. If you are working on your own, it does not matter which one you use (other than set 21 which is used for examples in the text). You should download your data set in Stata format from the OUP website. I shall represent the path to the subfolder with your data set as path\. To open the dataset, you should type the following command in the console box open path\eaef**.gdt where ** is the number of your data set. Thus if you are using data set 7 and have stored the data set in subfolder data of folder

gretl on your C: drive, path will be C:\gretl\data and the command will be
open c:\gretl\data\eaef07.gdt

Running a simple ordinary least squares regression

The command is ols. It should be followed by the name of the dependent variable, then const (assuming you want an intercept in the regression) and then the name of the explanatory variable. In this exercise the command is ols S const ASVABC Note that gretl is case sensitive. ols and const must always be lower case. S and ASVABC must be upper case because they are defined as upper case in the data set..

Saving and printing the output

An easy way to print the output is to block off the regression output that appears in the console window and paste it into a Word document (or other word-processor document). Change the font to Courier so that the output lines up properly. If the lines wrap, reduce the size of the font. Print this document in the usual way. Alternatively, you could save the whole console window as a text file and edit it afterwards.

Exercise 1.7 (EAEF)

The regression command is ols EARNINGS const S

Exercises 1.19 and 1.20 (EAEF)

and 1.7.

R2 is part of the output (unadjusted R-squared) in Exercises 1.6

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Exercises 2.16, 2.17, 2.21, and 2.22 (EAEF)

The t statistics are part of the output in Exercises 1.6 and 1.7.

Exercise 2.27 (EAEF)

You will need to use the standard error of the coefficient. It is part of the output in Exercise 1.7.

Exercise 2.30 (EAEF)

F statistics are generally calculated using data on the sums of the

squares of the residuals. Occasionally they may equivalently be calculated from data on R2, but since this is not always the case it is better to give priority to the sums of squares approach. Accordingly, in the next edition of the text, in this exercise I will ask students to use that approach instead (and then maybe confirm that the same F statistic can be obtained via R2). In the present case, using equation (2.66) in the text, the expression for F is

F k 1, n k

ESS / k 1 ESS RSS / n k RSS / n 2

since k = 2. However the output from a gretl regression reports RSS but does not report ESS. Given equation (2.64), we could calculate it as (TSS RSS), where TSS is the total sum of squares:

TSS

Y
n i 1

but TSS is not reported either. To get around this, regress the dependent variable on a constant only, fitting the model

Y 1 u
The estimator of 1 will be Y . The fitted value of Y in all observations will be Y . The residual in observation i will be

Yi Y , and hence RSS for this regression will be

Y
n 1

Y . By
2

definition, this is TSS for any regression with Y as the dependent variable. So run this regression first, and then compute ESS for the main regression as TSS RSS (RSS for the main regression). Thus the necessary commands are ols EARNINGS const ols EARNINGS const S To compute F from R2, use equation (2.68) in the text. gretl does not report the F statistic for simple regressions run in batch mode or from the console box. The (unstated) reason is that there is no need. It is automatically equal to the square of the t statistic of the coefficient of the explanatory variable (see section 2.7 of the text). However you may produce the F statistic by placing the following command immediately after the regression:
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Dougherty: Introduction to Econometrics 4e

genr F = ($rsq/($ncoeff-1))/((1-$rsq)/$df) The expression uses the R2 approach. ($rsq, $ncoeff, and $df are temporary scalars containing R2, the number of coefficients, and the number of degrees of freedom, respectively in the most recent regression.) In GUI mode the F statistic may be obtained directly via the analysis tab on the menu line.

Exercise 3.2 (EAEF)

ols S const ASVABC SM ols S const ASVABC SF ols S const ASVABC SM SF

Exercise 3.3 (EAEF)

ols EARNINGS const S EXP

Exercise 3.4 (EAEF)

ols S const ASVABC SF

$uhat is an invisible temporary variable that contains the residuals from the most recent regression. The next command saves them permanently as ES. genr ES = $uhat ols SM const ASVABC SF genr ESM = $uhat ols ES const ESM The exercise asks for a plot of ES on ESM. I have not managed to do this using console box commands.

Exercise 3.9 (EAEF)

Use the results from Exercises 3.2 and 3.3

Exercise 3.12 (EAEF)

An example might be ols WEIGHT02 const HEIGHT S AGE (What kinds of coefficient would you anticipate for S and AGE?)

Exercise 3.14 (EAEF)

ols S const SM SF ASVAB02 ASVAB03 ASVAB04 ols S const SM SF ASVABC corr ASVAB02 ASVAB03 ASVAB04

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Exercise 3.15 (EAEF)

The fourth command generates the new variable SP from the existing ones SM and SF. genr CHILDREN = SIBLINGS + 1 ols CHILDREN const SM SF corr SM SF genr SP = SM + SF ols CHILDREN const SP

Exercise 3.17 (EAEF)

genr PWE = AGE - S - 5 ols EARNINGS const S PWE ols EARNINGS const S PWE AGE corr S PWE AGE

Exercise 3.18 (EAEF)

ols S const ASVABC SM SF

Exercise 3.19 (EAEF)

ols S const ASVABC SM SF ASVAB05 ASVAB06

Exercise 3.20 (EAEF)

ols S const ASVABC SM SF ASVAB05

See Exercise 2.30 for a command that will produce the F statistic.

Exercise 4.4 (CES)

First you should download the CES data set CES.gdt from the OUP website, launch gretl, and open the data set with the open command (see Exercise 1.3). You should work with only one of the different categories of expenditure. (If the exercises are being done by a group, the instructor should assign a different category to each student.) The commands use CAT as a placeholder for the three or four letter name of your category. The first command restricts the sample to those observations with positive values for your category of expenditure. smpl CAT > 0 -restrict ols CAT const EXP Just to avoid any doubt, if your category were CLOT (clothing), the commands would be smpl CLOT > 0 --restrict ols CLOT const EXP

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Dougherty: Introduction to Econometrics 4e

To run the logarithmic regression, you first need to create the logarithmic variables genr LGCAT = log(CAT) genr LGEXP = log(EXP) ols LGCAT const LGEXP Note that log is log to base e, the natural logarithm. smpl full store path\CES.gdt In the last command, you should replace path\ by the path to the location where you have downloaded the CES data file. See Exercise 1.3 for further information on path\. The store command will overwrite the existing CES data file, preserving the new variables LGCAT and LGEXP. This means that you will not need to redefine them the next time that you need them. You should always save a data file after defining new variables if you think that you will need them again.

Exercise 4.5 (CES)

genr LGSIZE = log(SIZE) ols LGCAT const LGEXP LGSIZE store path\CES.gdt

Exercise 4.6 (EAEF)

genr LGWT85 = log(WEIGHT85) genr LGHT = log(HEIGHT) ols LGWT85 const LGHT

Exercise 4.9 (EAEF)

genr LGEARN = log(EARNINGS) ols LGEARN const S EXP store path\EAEF01.gdt

In the last command, you should replace EAEF01 by the name of your particular data set and path\ by the path to it. See Exercises 1.3 and 4.1 for further information. The store command will overwrite the existing data file, preserving the new variable LGEARN. This means that you will not need to redefine LGEARN the next time that you need it.

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Exercise 4.10 (EAEF)

genr EARNSTAR = EARNINGS/exp(mean(LGEARN)) genr LGEARNST = log(EARNSTAR) ols EARNSTAR const S EXP ols LGEARNST const S EXP

mean(LGEARN)produces the mean of LGEARN and exp(mean(LGEARN)) produces its exponential.

Exercise 4.11 (CES)

smpl CAT > 0 --restrict genr CATSTAR = CAT/exp(mean(LGCAT)) genr LGCATST = log(CATSTAR) ols CATSTAR const EXP SIZE ols LGCATST const LGEXP LGSIZE

Exercise 4.13 (EAEF)

genr SMSQ = SM*SM ols S const SM SMSQ genr SM12 = SM - 12 genr SM12SQ = SM12*SM12 ols S const SM12 SM12SQ

Exercise 4.15 (EAEF)

ols WEIGHT02 const HEIGHT genr YHAT = $yhat genr YHATSQ = YHAT*YHAT ols WEIGHT02 const HEIGHT YHATSQ

Exercise 5.1 (EAEF)

ols S const ASVABC SM SF MALE

Exercise 5.3 (EAEF)

ols LGEARN const S EXP MALE

See Box 5.1 in the text for a guide to the interpretation of dummy variable coefficients in semilogarithmic regressions.

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Exercise 5.6 (EAEF)

ols S const ASVABC SM SF MALE ETHBLACK ETHHISP

Exercise 5.8 (EAEF)

ols LGEARN const S EXP MALE ETHBLACK ETHHISP

Exercise 5.10 (EAEF)

Use the results from Exercises 5.1 and 5.6.

Exercise 5.11 (EAEF)

Use the results from Exercises 5.3 and 5.8.

Exercise 5.12 (EAEF)

ols S const ASVABC SM SF MALE ETHHISP ETHWHITE

Exercise 5.11 (EAEF)

ols LGEARN const S EXP MALE ETHHISP ETHWHITE

Exercise 5.14 (EAEF)

ols LGEARN const S EXP MALE FEMALE

Exercise 5.15 (EAEF)

genr MALEASVC = MALE*ASVABC ols S const ASVABC SM SF MALE ETHBLACK ETHHISP MALEASVC store path\EAEF**.gdt

In the last command, you should replace ** by the number of your particular data set and path\ by the path to it. See Exercises 1.6 and 4.4 for further information. The store command will overwrite the existing data file, preserving the new variable MALEASVC. This means that you will not need to redefine MALEASVC the next time that you need it.

Exercise 5.17 (EAEF)

genr MALES = MALE*S ols LGEARN const S EXP MALE ETHHISP ETHWHITE MALES store path\EAEF**.gdt

In the last command, you should replace ** by the number of your particular data set and path\ by the path to it. See Exercises 1.6 and 4.4 for further information.

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Exercise 5.18 (EAEF)

genr MALEBLAC = MALE*ETHBLACK genr MALEHISP = MALE*ETHHISP ols S const ASVABC SM SF MALE ETHBLACK ETHHISP MALEBLAC MALEHISP store path\EAEF**.gdt

In the last command, you should replace ** by the number of your particular data set and path\ by the path to it. See Exercises 1.6 and 4.4 for further information.

Exercise 5.19 (EAEF)

ols S const ASVABC SM SF ETHBLACK ETHHISP smpl MALE = 1 --restrict ols S const ASVABC SM SF ETHBLACK ETHHISP smpl full smpl MALE = 0 --restrict ols S const ASVABC SM SF ETHBLACK ETHHISP smpl full

The smpl command is cumulative. smpl MALE = 1 --restrict eliminates all the female observations. If it is followed by smpl MALE = 0 --restrict, all the male observations are eliminated as well, leaving a null data set. To avoid this, any smpl command that is temporary and no longer needed should be cancelled with the smpl full command. This restores the sample to the full sample.

Exercise 5.20 (EAEF)

ols LGEARN const S EXP MALE ETHBLACK ETHHISP smpl MALE = 1 --restrict ols LGEARN const S EXP MALE ETHBLACK ETHHISP smpl full smpl MALE = 0 --restrict ols LGEARN const S EXP MALE ETHBLACK ETHHISP smpl full

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Exercise 5.21 (EAEF)

genr MALESM = MALE*SM genr MALESF = MALE*SF ols S const ASVABC SM SF MALE ETHBLACK ETHHISP MALEASVC MALESM MALESF MALEBLAC MALEHISP ols S const ASVABC SM SF ETHBLACK ETHHISP corr ASVABC SM SF MALE ETHBLACK ETHHISP MALEASVC MALESM MALESF MALEBLAC MALEHISP store path\EAEF**.gdt

Note that the command for the first regression is so long that it has wrapped to a second line. This is fine is you are using the command line (console box). However, if you are writing a batch file, gretl treats each line as a separate command. To indicate that a second line is a continuation of the first, one needs to insert a backslash at the end of the first line. The corr command computes the correlations between the variables listed. It has also wrapped and would need a backslash at the end of the first line if you were writing a batch file. In the last command, you should replace ** by the number of your particular data set and path\ by the path to it. See Exercises 1.6 and 4.4 for further information.

Exercise 5.22 (EAEF)

genr MALEEXP = MALE*EXP ols LGEARN const S EXP MALE ETHBLACK ETHHISP MALES MALEEXP MALEBLAC MALEHISP ols LGEARN const S EXP ETHBLACK ETHHISP corr S EXP MALE ETHBLACK ETHHISP MALES MALEEXP MALEBLAC MALEHISP store path\EAEF01.gdt

In the last command, you should replace ** by the number of your particular data set and path\ by the path to it. See Exercises 1.6 and 4.4 for further information.

Exercise 6.1 (EAEF)

ols S const ASVABC SM ols S const ASVABC ols S const SM corr ASVABC SM

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Exercise 6.2 (EAEF)

ols LGEARN const S EXP ols LGEARN const S ols LGEARN const EXP corr S EXP

Exercise 6.3 (EAEF)

ols LGEARN const S EXP MALE ETHBLACK ETHHISP ols LGEARN const S EXP MALE ETHBLACK ETHHISP ASVABC corr S EXP MALE ETHBLACK ETHHISP ASVABC

Exercise 6.8 (EAEF)

ols LGEARN const S EXP ASVABC MALE ETHBLACK ETHHISP ols LGEARN const S EXP ASVABC MALE ETHBLACK ETHHISP SIBLINGS corr S EXP ASVABC MALE ETHBLACK ETHHISP SIBLINGS

Exercise 6.9 (EAEF)

If you did Exercise 3.14 and saved your data set afterwards, you do not need to define PWE again here. genr PWE = AGE - S - 5 ols LGEARN const S ASVABC MALE ETHBLACK ETHHISP ols LGEARN const S ASVABC MALE ETHBLACK ETHHISP PWE ols LGEARN const S ASVABC MALE ETHBLACK ETHHISP EXP corr S EXP PWE

Variation
smpl MALE = 1 --restrict ols LGEARN const S ASVABC MALE ETHBLACK ETHHISP ols LGEARN const S ASVABC MALE ETHBLACK ETHHISP PWE ols LGEARN const S ASVABC MALE ETHBLACK ETHHISP EXP corr S EXP PWE smpl full smpl MALE = 0 --restrict ols LGEARN const S ASVABC MALE ETHBLACK ETHHISP ols LGEARN const S ASVABC MALE ETHBLACK ETHHISP PWE ols LGEARN const S ASVABC MALE ETHBLACK ETHHISP EXP corr S EXP PWE smpl full
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Exercise 6.11 (EAEF)

The text should have specified using ASVABC as an explanatory variable in the second regression as well as in the first. genr PREVEXP = EXP - TENURE ols LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP ols LGEARN const S ASVABC PREVEXP TENURE MALE ETHBLACK ETHHISP smpl MALE = 1 --restrict ols LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP ols LGEARN const S ASVABC PREVEXP TENURE MALE ETHBLACK ETHHISP smpl full smpl MALE = 0 --restrict ols LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP ols LGEARN const S ASVABC PREVEXP TENURE MALE ETHBLACK ETHHISP smpl full

Exercise 6.12 (EAEF)

ols LGEARN const S ASVABC EXP TENURE MALE ETHBLACK ETHHISP smpl MALE = 1 --restrict ols LGEARN const S ASVABC EXP TENURE MALE ETHBLACK ETHHISP smpl full smpl MALE = 0 --restrict ols LGEARN const S ASVABC EXP TENURE MALE ETHBLACK ETHHISP smpl full

Exercise 6.14 (EAEF)

ols S const SM SF ASVABC ols S const SM SF ASVAB02 ASVAB03 ASVAB04

Exercise 7.3 (EAEF)

As should be obvious, the first command sorts the observations in (increasing) size of S. The second command restricts the sample to the first 203 of the sorted observations (approximately three-eights of 540). The fourth command redefines the sample as those observations with the 203 largest values of S. The specification has deliberately been kept rather simple, in anticipation of Exercise 7.4. Obviously it would be a good idea to add ASVABC, ETHBLACK, and ETHHISP.

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dataset sortby S smpl 1 203 ols EARNINGS const S EXP MALE smpl 338 540 ols EARNINGS const S EXP MALE smpl full

Exercise 7.4 (EAEF)

It is assumed that MALES and MALEEXP have been defined and saved in previous exercises. The residuals from the first regression are saved as EEARN. As in Exercise 7.3, it would be a good idea to add ASVABC, ETHBLACK, and ETHHISP to the specification ... and their squares and interactions with each other and the other variables to the test equation. The final command is a special gretl function that produces the test statistic, nR2, for the White test. ols EARNINGS const S EXP MALE genr EEARN = $uhat genr EEARNSQ = EEARN*EEARN genr SSQ = S*S genr EXPSQ = EXP*EXP genr SEXP = S*EXP ols EEARNSQ const S EXP MALE SSQ EXPSQ SEXP MALES MALEEXP genr WHITE = $trsq

Exercise 7.6 (EDUC)

It is assumed that you have downloaded the EDUC data set and have opened it within gretl. dataset sortby GDP smpl 1 14 ols EDUC const GDP smpl full smpl 25 38 ols EDUC const GDP smpl full

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Exercise 7.8 (EAEF)

It is assumed that the variables defined in Exercise 7.4 have been saved.

Repeat of Exercise 7.3 with LGEARN

dataset sortby S smpl 1 203 ols LGEARN const S EXP MALE smpl 338 540 ols LGEARN const S EXP MALE smpl full

Repeat of Exercise 7.4 with LGEARN

ols LGEARN const S EXP MALE genr EELG = $uhat genr EELGSQ = EELG*EELG genr SSQ = S*S genr EXPSQ = EXP*EXP genr SEXP = S*EXP ols EELGSQ const S EXP MALE SSQ EXPSQ SEXP MALES MALEEXP genr WHITELG = $trsq

Exercise 7.9 (EDUC)

Scaling by population
genr EDUCPOP = EDUC/POP genr GDPPOP = GDP/POP genr RECPOP = 1/POP dataset sortby GDPPOP smpl 1 14 ols EDUCPOP RECPOP GDPPOP smpl full smpl 25 38 ols EDUCPOP RECPOP GDPPOP smpl full

Scaling by GDP
genr EDUCGDP = EDUC/GDP genr RECGDP = 1/GDP dataset sortby RECGDP smpl 1 14

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ols EDUCGDP const RECGDP smpl full smpl 25 38 ols EDUCGDP const RECGDP smpl full

Logarithmic specification
genr LGEDUC = log(EDUC) genr LGGDP = log(GDP) dataset sortby LGGDP smpl 1 14 ols LGEDUC const LGGDP smpl full smpl 25 38 ols LGEDUC const LGGDP smpl full

Whole sample regressions, for comparison

ols EDUCPOP RECPOP GDPPOP ols EDUCGDP const GDPREC ols LGEDUC const LGGDP

Exercise 8.14 (EAEF)

The command for undertaking an instrumental variable regression is tsls (short for two stage least squares; all IV regressions may be considered to be special cases of this estimation procedure). The first item after the command is, as usual, the dependent variable, and this is followed by const (assuming that you do want a constant) and the list of the explanatory variables appearing in the regression. Then follows a semicolon, and finally the list of the instrumental variables being used. gretl follows the convention that any variable that does not need an instrument is said to be acting as its own instrument and so should be included in the list of instruments following the semicolon. This applies even to the constant. Hence the list of instruments is the same as the list of the explanatory variables except (1) those variables needing instruments do not appear, and the external instruments do appear. In this case ASVABC is dropped from the list of instruments because it is being instrumented, and SM, SF, SIBLINGS, and LIBRARY are included in the list of instruments. The DurbinWuHausman test is automatically included in the tsls regression output. It is implemented by gretl in a way that is different from that used in Stata and so may give somewhat different results. tsls LGEARN const S EXP ASVABC ; const S EXP SM SF SIBLINGS LIBRARY corr ASVABC SM SF SIBLINGS LIBRARY The second command has been included to investigate the strength of the correlation between ASVABC and the instruments. Although the exercise in the text does not suggest including MALE, ETHBLACK, and

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ETHHISP in the regression, obviously this would improve the specification. tsls LGEARN const S EXP ASVABC MALE ETHBLACK ETHHISP ; const S EXP MALE ETHBLACK ETHHISP SM SF SIBLINGS LIBRARY

Exercise 9.10 (EAEF)

ols ASVABC const S tsls ASVABC const S ; const SM cor S SM

Exercise 10.4 (EAEF)

genr COLLEGE = (S > 12) ols COLLEGE const ASVABC SM SF MALE logit COLLEGE const ASVABC SM SF MALE --p-values logit COLLEGE const ASVABC SM SF MALE

The first command generates COLLEGE as a dummy variable that is equal to 1 when the condition in parentheses is satisfied and equal to 0 when it is not. So COLLEGE is equal to 1 for those who had more than 12 years of schooling (which means that they must have at least one year of college) and it is 0 for the rest. The second command performs a linear probability model regression. The third performs the corresponding logit regression. The fourth does the same, except that the output reports the marginal effects instead of the p values. As can be seen, this is actually the default for the logit regression in gretl. The marginal effects are calculated at the mean values of tall of the explanatory variables.

Exercise 10.6 (EAEF)

probit COLLEGE const ASVABC SM SF MALE --p-values probit COLLEGE const ASVABC SM SF MALE

Exercise 10.8 (LFP)

genr MARL06 = MARRIED*CHILDL06 smpl MALE = 0 --restrict probit WORKING const S AGE CHILDL06 CHILDL16 MARRIED MARL06 ETHBLACK ETHHISP --p-values probit WORKING const S AGE CHILDL06 CHILDL16 MARRIED MARL06 ETHBLACK ETHHISP

Exercise 10.9 (CES)

Remember, CAT is a placeholder for your category of expenditure. See Exercise 4.4. ols CAT const EXP

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smpl CAT > 0 --restrict ols CAT const EXP smpl full tobit CAT const EXP The first command fits the regression using all the observations, including the zero observations. The next two commands do the same, restricting the sample to the non-zero observations. The last performs the tobit regression.

Exercise 10.11 (EAEF)

smpl S > 12 --restrict genr COLLYEAR = S - 12 genr LGEARNCL = LGEARN ols LGEARNCL const COLLYEAR EXP ASVABC MALE ETHBLACK ETHHISP smpl full genr D = (S > 12) heckit LGEARNCL const COLLYEAR EXP ASVABC MALE ETHBLACK ETHHISP ; D const ASVABC MALE ETHBLACK ETHHISP SM SF SIBLINGS

The third command defines the logarithm of earnings for those who went to college. It is not defined for the rest. The sixth command defines a dummy variable D that is equal to 1 for observations that are selected and 0 for the rest. The first part of the heckit command regresses the logarithm of earnings on the usual explanatory variables. The second part (after the semicolon) lists the dummy variable D followed by the variables used to explain selection. If this command is being used in a batch file, a backslash should be added at the end of the first line to indicate that the command continues to a second line.

Exercise 10.13 (LFP)

genr MARL06 = MARRIED*CHILDL06 genr LGEARN = ln(EARNINGS) smpl MALE = 0 --restrict heckit LGEARN const S ASVABC ETHBLACK ETHHISP ; WORKING const S ASVABC ETHBLACK ETHHISP AGE CHILDL06 CHILDL16 MARRIED MARL06

The data set is lfp.gdt. Compare the regression results with those in Table 10.8 in the textbook. The basic regression specification is the same. The only difference is in the specification of the selection model. Note that WORKING is a dummy variable that indicates that the individual has been selected into the sample. It is not an explanatory variable. It has the same function as D in Exercise 10.11.

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Exercise 11.2 Construction of a relative price index (DF)

In the commands in this and the following exercises, CAT is a place holder and should be replaced by the three or four letter name of your category of expenditure. open path\demand.gdt genr PRELCAT = 100*PCAT/PTPE plot PRELCAT Thus, if your category were FLOW, the second and third commands would be genr PRELFLOW = 100*PFLOW/PTPE plot PRELFLOW store path\demand.gdt The plot is part of the output file and in ASCII format, so somewhat unsophisticated. Better plots can be obtained using the gnuplot facility bundled with gretl. I do not know how to use it from the command line, but it can be accessed easily through the GUI via the View/Graph specified vars tab on the main menu. You will need PRELCAT in many of the following exercises, so save the data set once it has been defined, overwriting the existing one.

Exercise 11.3 Linear regression (DF)

ols CAT const DPI PRELCAT

Exercise 11.4 Logarithmic multiple regression (DF)

genr LGDPI = log(DPI) genr LGCAT = log(CAT) genr LGPRCAT = log(PRELCAT) ols LGCAT const LGDPI LGPRCAT store path\demand.gdt

Exercise 11.5 Multicollinearity (DF)

ols LGCAT const LGDPI LGPRCAT TIME corr LGCAT LGDPI LGPRCAT TIME

Exercise 11.9 Naive attempts to model dynamics (DF)

The lags command creates lagged versions of existing variables. The command is followed by the number of lags desired, then a semicolon, and then a list of the variables in question. Thus LGDPI_1 is LGDPI lagged one time period (in this case, one year), and LGDPI_2 is
LGDPI lagged two time periods.

lags 2 ; LGCAT LGDPI LGPRCAT

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ols LGCAT_1 const LGDPI_1 LGPRCAT_1 ols LGCAT_2 const LGDPI_2 LGPRCAT_2

Exercise 11.11 Simple dynamics: a partial adjustment model (DF)

lags CAT ols CAT const DPI PRELCAT CAT_1 ols LGCAT const LGDPI LGPRCAT LGCAT_1

If the lags command is followed by a variable name or names, it is assumed that only the first lag is required.

Exercise 12.3 Tests for autocorrelation (DF)

When it was defined, the Demand Functions data set was declared to be a time series set with annual data from 1959 to 2003. This accounts for the inclusion of the DurbinWatson d statistic among the diagnostic statistics. The last three commands below are for the BreuschGodfrey test. Remember that $uhat is a temporary variable containing the residuals from the most recent regression. ols LGCAT const LGDPI LGPRCAT genr ECAT = $uhat lags ECAT ols ECAT const LGDPI LGPRCAT ECAT_1

Exercise 12.4 Plot of residuals (DF)

See Exercise 11.2 for remarks about plots. ols LGCAT const LGDPI LGPRCAT genr ECAT = $uhat plot ECAT

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Exercise 12.5 Comparison of OLS and AR(1) specifications (DF)

ar1 implements the CochraneOrcutt iterative procedure for fitting a regression assumed to be subject to AR(1) autocorrelation. Adding -pwe at the end changes the estimation method to the PraisWinsten variation. This retains the use of the first observation, which is lost under CO, and may lead to a gain in efficiency. ols LGCAT const LGDPI LGPRCAT ar1 LGCAT const LGDPI LGPRCAT ar1 LGCAT const LGDPI LGPRCAT --pwe

Exercise 12.8 Common factor test (DF)

The third, fourth, and fifth commands are for performing the BreuschGodfrey test. ar1 LGCAT const LGDPI LGPRCAT ols LGCAT const LGCAT_1 LGDPI LGDPI_1 LGPRCAT LGPRCAT_1 genr ECAT = $uhat lags ECAT ols ECAT const LGCAT_1 LGDPI LGDPI_1 LGPRCAT LGPRCAT_1 ECAT_1 ols LGCAT const LGCAT_1 LGDPI LGPRCAT

Exercise 13.8 Tests for unit roots (DF)

The diff command creates new variables defined as the first differences of the variables listed. The names are the names of the variables preceded by d_. The adf command produces the augmented DickeyFuller test statistic for the variable listed. The number after adf gives the number of lagged differences to be included in the regression specification. Thus adf 1 presupposes a model of the type given by equation (13.70) in the text with the addition of a deterministic time trend. Options include --nc (no constant, no time trend), --c (constant, no time trend), and --ct (both constant and time trend). Adding --verbose produces the full output for the regression. diff LGCAT LGPRCAT adf 1 LGCAT --ct adf 1 d_LGCAT --ct adf 1 LGPRCAT --ct adf 1 d_LGPRCAT --ct

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Exercise 13.12 Test for cointegration (DF)

ols LGCAT const LGDPI LGPRCAT genr ECAT = $uhat adf 1 ECAT --nc

Remember that $uhat is a temporary variable that contains the residuals from the most recent regression.

Exercise 13.14 Error correction model (DF)

diff LGDPI lags 1 ECAT ols d_LGCAT ECAT_1 d_LGDPI d_LGPRCAT

Exercise 14.1 Pooled OLS regression (OECD2000)

open path\OECD2000.gdt ols E const G TIME2 TIME3

Exercise 14.2 (OECD2000)

There are various ways of indicating to gretl that a data set has the dual structure required for panel regressions. One, used here, is to specify the unit indicator and the time indicator, followed by -panel-vars. Here the units are countries and ID is the country indicator. The time indicator is simply TIME itself. The panel command fits a within-groups fixed effects model by default. It automatically includes a test for the presence of fixed effects, the null hypothesis being that they do not exist and that a pooled OLS regression is adequate (and preferable, being more efficient because it does not involve the estimation of unnecessary dummy variable coefficients). The panel command does this by performing an F test of the joint explanatory power of the dummy variables in the least squares dummy variables (LSDV) version of the fixed effects model, the specification with an intercept and no dummy for one of the units of observation. It compares RSS for the LSDV model with RSS for the pooled OLS regression. At least this is what is says it is doing. It does not actually have to fit the LSDV model itself because the withingroups regression is equivalent. setobs ID TIME --panel-vars panel E const G TIME2 TIME3

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Exercise 14.3 (OECD2000)

D* is interpreted by gretl as shorthand for a list of all the variables in the data set starting with D and is a convenient way of including all the country dummies in the specification. The delete command is supposed to cause the listed variable(s) to be dropped from the data set. If the specification includes an intercept, it is necessary to drop one of the dummies. However I have not succeeded in getting this command to work. So in the second regression, DAUS still exists and the specification is subject to exact multicollinearity. To avoid this, gretl drops the final dummy variable (that for the USA).

ols E G TIME2 TIME3 D* delete DAUS ols E const G TIME2 TIME3 D*

Exercise 14.4 (OECD2000)

Use RSS from Exercise 14.1 and second regression in 14.3

Exercise 14.5 (NLSY2000)

open path\NLSY2000.gdt setobs ID TIME --panel-vars genr LGEARN = log(EARNINGS) ols LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP panel LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP store path\NLSY2000.gdt

Exercise 14.6 (NLSY2000)

The --random-effects switch indicates to gretl that the panel regression should be random effects, rather than the default withingroups fixed effects. After performing a random effects regression, gretl automatically compares the results with those of pooled OLS and fixed effects regressions. It performs a BreuschPagan test to test for the presence of random effects, the null hypothesis being that pooled OLS is adequate. It performs a Hausman test to discriminate between the presence of random and fixed effect, the null hypotheses being random effects. ols LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP UNION panel LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP UNION --randomeffects

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Exercise 14.7 (NLSY2000)

If a data set has been declared to be panel data,, placing the hausman command after a pooled OLS regression will automatically cause the corresponding fixed and random effects models also to be fitted and the three tests already described to be performed: the F test discriminating between pooled OLS and fixed effects (see Exercise 14.2), the BreuschPagan test discriminating between pooled OLS and random effects, and the Hausman test itself discriminating between fixed effects and random effects. ols LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP hausman panel LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP panel LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP --random-effects

Exercise 14.8 (NLSY2000)

hausman

ols LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP UNION

panel LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP UNION panel LGEARN const S ASVABC EXP MALE ETHBLACK ETHHISP UNION --randomeffects

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