A Model That Attracted Quite a Bit of Interest in Macroeconomics

question 15

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?
(b)Sketch the estimated dynamic and cumulative dynamic fiscal and monetary multipliers.
(c)For these coefficients to represent dynamic multipliers, the money supply and government expenditures must be exogenous variables. Explain why this is unlikely to be the case. As a result, what importance should you attach to the above results?

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Definitions:

Future Amount

The expected value of an asset or amount of money at a specific date in the future, often factoring in variables like interest rates and compounding periods.

Present Value Concept

A financial calculation that determines the value of a payment or series of payments in the present, by discounting future cash flows.

Equal Annual Payments

A financing repayment method where the borrower makes consistent yearly payments over the term of the loan, covering both principal and interest.

Compounded Annually

Interest on an investment or loan that is calculated once a year, where the interest earned each year is added to the principal, so that the balance doesn't merely grow, it grows at an increasing rate.