In Your Intermediate Macroeconomics Course, Government Expenditures and the Money

question 18

Essay

In your intermediate macroeconomics course, government expenditures and the money
supply were treated as exogenous, in the sense that the variables could be changed to
conduct economic policy to influence target variables, but that these variables would not
react to changes in the economy as a result of some fixed rule.The St.Louis Model,
proposed by two researchers at the Federal Reserve in St.Louis, used this idea to test
whether monetary policy or fiscal policy was more effective in influencing output
behavior.Although there were various versions of this model, the basic specification was
of the following type: $$\Delta \ln \left( Y _ { t } \right) = \beta _ { 0 } + \beta _ { 1 } \Delta \ln m _ { t } + \ldots + \beta _ { p } \Delta \ln m _ { t - p - 1 } + \beta _ { p + 1 } \Delta \ln G _ { t } + \ldots + \beta _ { p + q } \Delta \ln G _ { t - q - 1 } + u _ { t }$$ Assuming that money supply and government expenditures are exogenous, how would
you estimate dynamic causal effects? Why do you think this type of model is no longer
used by most to calculate fiscal and monetary multipliers?

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Definitions:

Influence

The capacity or power of individuals or things to be a compelling force on the actions, behavior, opinions, or development of others.

Loss and Risk Aversion Heuristic

A cognitive bias where people prefer to avoid losses rather than acquiring equivalent gains, indicating a greater sensitivity to losses over gains.

Error

A mistake or inaccuracy, often due to oversight or misunderstanding, which can affect outcomes or validity.

Judgment

The faculty to formulate thoughtful decisions or derive sound conclusions.