Econometricians are often employed as consultants to provide predictions about the likelihood of future events. One of the most globally important (potentially predictable) events in the next few years will be the US presidential election in 2016. This will be a contest between nominees from the Democratic and Republican US political parties, and much is dependent upon the eventual winner.
Imagine that you have been contracted to predict the result of this election. You are required to (i) build a suitable econometric model, (ii) run some simulations to predict the winner (based upon some inputs which you may assume), and (iii) write a short justification (2-3 hundred words) of your specific model and its results. You should look to extend the basic model used in the textbook for this exercise in your own way, and therefore everybody should end up with a different answer.
Data from previous US presidential elections can be found in the file Fair4.wf1. The variables are defined as follows.
Vote: Vote share of the incumbent party.
Year: Election year.
Party: 1 if the incumbent is a Democrat, -1 if a Republican.
Duration: A measure of the time the current party has held the White House.
War: A dummy for involvement in large foreign wars.
Growth: GDP growth rate in the year of the election.
Inflation: Inflation over the last presidential term.
Goodnews: The number of quarters where growth exceeds 3.2% over the last term.
Person: A dummy variable indicating whether or not the sitting president is running for re-election.