In Your Intermediate Macroeconomics Course, Government Expenditures and the Money

question 24

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:
Δln(Y_t)= β₀ + β₁Δln m_t + ... + β_pΔln m_t-p-1 + β_p+1Δln G_t + ... + β_p+qΔln 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:

Supply Curve

A graph showing the relationship between the price of a good and the quantity of the good supplied by producers.

Tax Subsidy

A government benefit that effectively reduces the tax that a business or individual owes.

Excise Tax

A tax imposed on specific goods, services, or transactions, typically including alcohol, tobacco, and fuel, aimed at raising government revenue or affecting consumption patterns.

Price Paid

The amount of money exchanged for a good or service in a transaction.