In a Study of the Long-Run and Short-Run Demands for Money

question 4

Essay

In a study of the long-run and short-run demands for money, Chow estimated the following demand equation (standard errors in parentheses) for the United States from 1947:1 through 1965:4: $$\begin{array} { l } \hat { \mathrm { M } } _ { \mathrm { t } } = 0.14 + 1.05 \mathrm { Y } _ { \mathrm { t } } ^ { * } - 0.01 \mathrm { Y } _ { \mathrm { t } } - 0.75 \mathrm { R } _ { \mathrm { t } } \\\text { (0.15) (0.10) (0.05) } \\\overline { \mathrm { R } } ^ { 2 } = 0.996 \quad \mathrm { DW } = 0.88 \quad \mathrm {~N} = 76 \text { (quarterly) } \\\end{array}$$ where: M_t = the log of the money stock in quarter t
$\mathrm { Y } _ { \mathrm { t } } ^ { * }$ =the log of permanent income (a moving average of previous quarters' current
income) in quarter t
Y_t =the log of current income in quarter t
r_T = the log of the rate of interest in quarter t
(a) Hypothesize signs and test the appropriate null hypotheses at the 5% level of significance.
(b) What econometric problems seem likely to be in this equation?
(c) In particular, are there are any problems related to the coefficient of Y? If so, are these problems more likely to have been caused by multicollinearity, serial correlation, or heteroskedasticity?
(d) What suggestions would you have for another estimation of this equation? Why?

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Definitions:

Pancreas

An organ in the abdominal cavity that plays a crucial role in digestion and the regulation of blood sugar by producing enzymes and hormones like insulin and glucagon.

Esophagus

A muscular tube that connects the throat to the stomach, transporting swallowed food and liquids.

Throat

The anterior part of the neck, housing the pharynx and vocal cords, and leading to the esophagus and larynx.

Pharynx

The muscular tube that connects the mouth and nasal passages with the esophagus and larynx, serving both respiratory and digestive functions.