Going from General to Specific

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1 Going from General to Specific Regression of Interest rate on All 7 Variables Comments: R Square is good at 63.8% The residual plot on the right is not looking entirely random Unemployment variable has high P value so can be dropped first Multiple R R Square Adjusted R Standard E Regression E-139 Residual Intercept INFL E PROD UNEMPL COMMPRI PCE E PERSINC E HOUST E Regression of Interest rate on Variables excluding Unemp Comments: R square is strong at 63.79% Plot of residuals on right is not entirely random Can drop Prod variable as it has high P value of 0.323

2 Multiple R R Square Adjusted R Standard E Regression E-140 Residual Intercept INFL E PROD COMMPRI PCE E PERSINC E HOUST E Regression of Interest rate on Variables excluding Unemp & Housing Multiple R R Square Adjusted R Standard E Comments: R square is strong at 63.73% Will drop Commpri as it has slightly higerh P value of vs others Regression E-141 Residual Intercept INFL E COMMPRI PCE E PERSINC E HOUST E

3 Regression of Interest rate on Variables excluding Commpri, Unemp & Prod Comments: R square is strong The remaining 4 variables do an adequate job in explaining Y P values are all v low now Optimal regression in my view Multiple R R Square Adjusted R Standard E Regression E-141 Residual Intercept INFL E PCE E PERSINC E HOUST E GOING FROM SPECIFIC TO GENERAL Regression of Interest rate on inflation only Comments Multiple R R Square Adjusted R R square is 55.9% so inflation explains 55.9 pct of variation in Interest rate P value is low T statistic is significant

4 Standard E Regression E-119 Residual Intercept E INFL E Regression of Interest rate on inflation & PCE only Comments Multiple R R Square Adjusted R Standard E R square has increased after including PCE to the regression P values of both variables are low T stat is significant Regression E-133 Residual Intercept INFL E PCE E Regression of Interest rate on inflation, Personal INc & PCE only Comments R square has increased to 61.9% after adding Personal inc P values are low for all three variables

5 Multiple R R Square Adjusted R Standard E Regression E-137 Residual Intercept INFL E PCE PERSINC E Regression of Interest rate on inflation, Housing, Personal INc & PCE only Comments R square has risen further P values are low T stat is significant Optimal regression (am not adding any more variables) Multiple R R Square Adjusted R Standard E Regression E-141 Residual Intercept INFL E PCE E

6 PERSINC E HOUST E Questio Compare model to equation specificed in taylor rule My model has more variables than specified in taylor rule equation Interest rate = *Inflation *PCE * PersInc *Housing Model explains 63.28% variation in Interest rate My models derived from general to specific, and specific to general is the same

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