Plot the value of from 1970:M01 through 2012:M12. The plot should look “choppy” or “jagged.” Explain why this behavior is consistent with the first autocorrelation that is computed in part (i) for .

Compute Run an OLS regression of on . Does knowing the inflation this month help predict the inflation next month? Explain.

Estimate an AR(2) model for Infl. Is the AR(2) model better than an AR(1) model? Explain.

Estimate an AR(p) model for . What lag length is chosen by BIC? What lag length is chosen by AIC?

Use the AR(2) model to predict “the level of the inflation rate” in 2013:M01—that is, .

Use the ADF test for the regression in Equation (14.31) with two lags of to test for a stochastic trend in .

Is the ADF test based on Equation (14.31) preferred to the test based on Equation (14.32) for testing for stochastic trend in ? Explain.