You Want to Determine Whether or Not the Unemployment Rate

question 46

Essay

You want to determine whether or not the unemployment rate for the United States has a stochastic trend using the Augmented Dickey Fuller Test (ADF). The BIC suggests using 3 lags, while the AIC suggests 4 lags.
(a)Which of the two will you use for your choice of the optimal lag length?
(b)After estimating the appropriate equation, the t-statistic on the lag level unemployment rate is (-2.186)(using a constant, but not a trend). What is your decision regarding the stochastic trend of the unemployment rate series in the United States?
(c)Having worked in the previous exercise with the unemployment rate level, you repeat the exercise using the difference in United States unemployment rates. Write down the appropriate equation to conduct the Augmented Dickey-Fuller test here. The t-statistic on relevant coefficient turns out to be (-4.791). What is your conclusion now?

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