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:

Brain Matter

Tissue making up the brain, categorized into gray matter (neuron cell bodies and dendrites) and white matter (myelinated axon tracts).

Neuroglial Cells

Specialized cells in the nervous system that provide support, protection, and nutrition to neurons, ensuring their proper function.

Myelin Sheath

A fatty layer that surrounds the axons of some nerve cells, providing electrical insulation and improving the speed of nerve impulse transmission.

Burst

A sudden break or rupture, typically referring to pipes, balloons, or vessels under pressure.