Econometrics 1 Consider the regression model of murderratet

Econometrics

1. Consider the regression model of:

murderrate_t = ₀ + ₁policebudget_t + _t

where murderrate_t is the annual murder rate in Fresno in year t, policebudget_t is the annual police budget in Bakersfield. The data set available has one observation for each of the last 40 years.

(a) What assumptions must hold for OLS to give an unbiased estimate of the _1,the structural effect of increasing the police budget on the murder rate?

(i) Which of these assumptions is most likely violated if policebudget_t, depends onmurderrate_t-1?

(b) What assumptions must hold for OLS to give a consistent estimate of the _1, the structural effect of increasing the police budget on the murder rate?

(i) Which of these assumptions is most likely violated if policebudget_t, depends on murderrate_t-1?

Solution

1. a. Independent variable is non-stochastic whose value is fixed.

i. serial correlation.

b. stochastic.