Question

In: Statistics and Probability

3. In a study of the long-run and short-run demands for money, Chow estimated the following...

3. In a study of the long-run and short-run demands for money, Chow estimated the following demand equation (standard errors in parentheses) for the United States from 1947:1 through 1965:4:

Mt=0.14+1.05Yt*-0.01Yt-0.75Rt

(0.15) (0.10) (0.05)

R²= 0.996

DW = 0.88^**

Breusch-Godfrey LM Test= 8.38^**

N = 76 (quarterly)

where:

Mt = the log of the money stock in quarter t

Yt^* = the log of permanent income (a moving average of previous quarters’ current income) in quarter t

Yt = the log of current income in quarter t

Rt = the log of the rate of interest in quarter t

a. Test for the significance of the coefficients and for the overall significance of the model.

b. What econometric problems seem likely to be in this equation?

c. In particular, are there are any problems related to the coefficient of Y? If so, are these problems more likely to have been caused by multicollinearity, serial correlation, or heteroskedasticity?

d. What suggestions would you have for another estimation of this equation? Why?

3. In a study of the long-run and short-run demands for money, Chow estimated the following demand equation (standard errors in parentheses) for the United States from 1947:1 through 1965:4:

Mt=0.14+1.05Yt*-0.01Yt-0.75Rt

(0.15) (0.10) (0.05)

R²= 0.996

DW = 0.88^**

Breusch-Godfrey LM Test= 8.38^**

N = 76 (quarterly)

where:

Mt = the log of the money stock in quarter t

Yt^* = the log of permanent income (a moving average of previous quarters’ current income) in quarter t

Yt = the log of current income in quarter t

Rt = the log of the rate of interest in quarter t

a. Test for the significance of the coefficients and for the overall significance of the model.

b. What econometric problems seem likely to be in this equation?

c. In particular, are there are any problems related to the coefficient of Y? If so, are these problems more likely to have been caused by multicollinearity, serial correlation, or heteroskedasticity?

d. What suggestions would you have for another estimation of this equation? Why?

Expert Solution

orchestra answered 1 year ago

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