## Serial Correlation in Residuals

The correlogram can also be used to check whether the assumption that model errors have zero covariance-an important assumption in the proof of the Gauss-Markov theorem. The example that illustrates this is based on the Phillips curve that relates inflation and unemployment. The data used are from Australia and reside in the phillips-aus. gdt dataset.

The model to be estimated is

inf = ві + в2 Аи* + et (9.6)

The data are quarterly and begin in 1987:1. A time-series plot of both series is shown below in Figure 9.10. The graphs show some evidence of serial correlation in both series.

The model is estimated by least squares and the residuals are plotted ag...

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