Question

Wall Street traders use cause-and-effect relationships to profit from news announcements concerning important economic variables such as the money supply. Economists called "Monetarists" have long argued that the primary long-run cause of inflation is excessive growth in the money stock. On the basis of this theory, Wall Street traders attempt to buy and sell stocks and bonds hoping to be the first to capitalize on news of changes in the money stock.

To assess the evidence of this proposition, we gathered monthly data over the period 1980 through 1990 on the M1 money stock and the consumer price index for the United States. We transformed the data using a logarithmic transformation and estimated the following linear regression model:

%∆ CPI = a + b %∆ Money Stock + e.

Results using OLS on a sample of size 132 are provided below.

Variable	Estimate	Standard Error	p-value
Constant	0.7603	.07791	0.002
Money Stock	1.5	.01220	0.001

What is the relationship between money stock and cpi? Interpret the coefficient for the money stock. Also, what does the constant indicate ?.

Answer 1

There is a positive relationship between money atock and CPU. Any increase in money stock will reuslt in I crease in CPI. This is shown by the positive estimate of money stock, which is 1.5 in magnitude.

This coefficient or estimate of money stock says that 1 % increase in money stock will result in 1.5% increase in CPI.

The constant estimate shows the intercept term of the regression line. It shows that even if money stock is zero, the CPI in the economy will be 0.7603