A Model That Attracted Quite a Bit of Interest in Macroeconomics

question 5

Essay

A model that attracted quite a bit of interest in macroeconomics in the 1970s was the St.
Louis model.The underlying idea was to calculate fiscal and monetary impact and long
run cumulative dynamic multipliers, by relating output (growth)to government
expenditure (growth)and money supply (growth).The assumption was that both
government expenditures and the money supply were exogenous.Estimation of a St.
Louis type model using quarterly data from 1960:I-1995:IV results in the following
output (HAC standard errors in parenthesis): where ygrowth is quarterly growth of real GDP, mgrowth is quarterly growth of real money supply (M2), and ggrowth is quarterly growth of real government expenditures. "d" in front of ggrowth and mgrowth indicates a change in the variable. (a)Assuming that money and government expenditures are exogenous, what do the
coefficients represent? Calculate the h-period cumulative dynamic multipliers from these.
How can you test for the statistical significance of the cumulative dynamic multipliers
and the long-run cumulative dynamic multiplier?

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Definitions:

Water Vapour

The gaseous phase of water present in the atmosphere, instrumental in the greenhouse effect and weather patterns.

Methane

A colorless, odorless flammable gas, CH4, used as a fuel and a significant greenhouse gas.

Nitrous Oxide

A colorless gas with a sweet odor, used as an anesthetic and analgesic, and also a significant greenhouse gas contributing to global warming.

Troposphere

The lowest layer of Earth's atmosphere, where all weather takes place, extending up to about 10 kilometers (6 miles) from the surface.