The following regressions are based on the CPI data for the United States for the period 1960-1999, for a total of 40 annual observations:
Where RSS = residual sum of squares.
a. Examining the preceding regressions, what can you say about stationarity of the CPI time series?
b. How would you choose among the three models?
c. Equation (1) is Eq. (3) minus the intercept and trend. Which test would you use to decide if the implied restrictions of model 1 are valid? (Hint: Use the Dickey-Fuller t and F tests. Use the approximate values given in Appendix D, Table D.7.)