Assessment Instructions MODELLING AND FORECASTING CONSUMERS EXPENDITURE IN THE UK This assignment gives you a chance to apply the econometric theory you have learned in Introductory Econometrics to the challenging task of modelling and forecasting consumers expenditure. Section 1 (10 marks) Using Stata and the data file Cons 1976-2019.xlsx, estimate the following initial model for the subperiod 19762016: Ct = ? + ?1Yt + ?2Ht + ?3Ct-1 + ?t (1) where Ct is households real final consumption expenditure (£ million) in year t Yt is households real disposable income (£ million) in year t Ht is the Nationwide real house price index in quarter 2 of year t (£ per house, 2019Q2 prices) ?t is a random error term with an expected value of zero in year t Using your log, paste in your initial results from Stata, along with a correlation matrix and summary table with means, standard deviations, etc. Section 2 (35 marks) Offer a brief rationale for the inclusion of the explanatory variables in model (1). Comment on your findings, referring particularly to the signs, values and statistical significance of the estimated coefficients. Be sure to explain how to interpret the values of the regression coefficients. How satisfactory is your initial model? You should play close attention to any problems of serial correlation, multicollinearity and heteroscedasticity, as well as to possible specification errors. Illustrate your answer with appropriate graphic output from Stata. Section 3 (35 marks) Now consider how you might refine your initial model. You should present the results for four models in a summary table (including your initial one in the first column) and explain how and why you refined your initial model. You should follow the general-to-specific (g-to-s) modelling methodology. You can use the Cons 1976-2019.xlsx data file as a source of data on additional variables. For consistency, all models must be fitted to data for 19762016. In your summary table, show standard errors in brackets beneath the regression coefficients, followed by t ratios in bold type and then p values. For each model, report R2, , D.W. and ?2 test statistics for serial correlation and heteroscedasticity (along with p values). Section 4 (10 marks) Using your preferred model, forecast consumers expenditure from 2017 to 2019. How accurate are the forecasts? Provide a plot of actual and fitted values of Ct. Try to account for any discrepancies between observed and forecasted expenditure. Section 5 (10 marks) Outline what improvements you think could be made to your preferred model if you had more time to devote to the modelling of consumers expenditure in the UK. Notes of guidance To maximize your mark, you should play close attention to the presentation of your work and to how it is written. Use 12 point font, preferably Times New Roman. Clarity, accuracy and good presentation will be rewarded. Make good use of tables and graphs. Check your work carefully to eliminate any grammatical, spelling and other errors. You need to demonstrate that you have read and understood relevant course materials. Make good use of your lecture and tutorial notes. All quotations must be properly referenced, including those from lecture slides and handouts (reference these as L1, L4, H4, etc.). Do not exceed 1350 words (exclusive of definitions, equations, tables, references, etc.). Finally, ensure that you carefully read the following warning.