Question

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?

Answer 1

Golutions The given demand emana equation in Mi - 014 + 1.05 Yi - O'olyt -0.75 RE - © (015) (010) Coros) and R =01996 , DW =0.88 , N=16 a) as me = Bot Bilt+ Testing hypothesis : Consider equation - B2Yz TF 3RE i Horbo zo vio HQ : Bo #0 HiHo : fico vle HQ :B:+0 li Ho : B2=0 uls HaiB 240 iv, HO: 83=0 ule Ha d .:B 3 +0 m Test Statistic for Bioße, ß3 t= Bi-ßj u tu in-k-, . j = 1,2,3 SELB;) thon iFle where , b = number of regressoss = 3 - SELBP) - slandard ersos of Bj cunder Ho, to find sehr ulnak ...j fork Ris t = Bi se Bis utaz

from we have ßia 105&SE (B7) 2015 int=105 27 0:15 ! al x = 54., t0.099,99 = 2.2892 since itist 0.005.12 we reject to. and Conclude that B: 40 I for B2 - from ♡ 8 = -001', SE (82) 20:10 to ê, e !! -0.01 E DE (BI Oilo t=-01 11:01 at x = 57. t 0.039.45 = 2.2892 since itlato.02572 , we fail to reject to and Conclude that Bh :o from , B: -0.75, SECAS) 20.05 to es Se C F 0175 IS . O'Os 1615.15 af. 57. 0.025. = 2:2892

(tlx to.025, 12, we reject to and Conclude that i 40 @ There is problem related to the Coefficient of y. Because of multicolineurity and cuesent income this between problem permanent income have been Coursed. GAD