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Category > Management Posted 11 Feb 2018 My Price 8.00

demand function for money

7.21.      Consider the following demand function for money in the United States for the period 1980–1998:

β2    β3   ut

Mt   = β1 Yt     rt  e

 

 

 

 

 

 

 

 

 

where M = real money demand, using the M2 definition of money

Y = real GDP

r = interest rate

To estimate the above demand for money function, you are given the data in Table 7.10.

Note: To convert nominal quantities into real quantities, divide M and GDP by CPI. There is no need to divide the interest rate variable by CPI. Also, note that we have given two interest rates, a short-term rate as mea- sured by the 3-month treasury bill rate and the long-term rate as mea- sured by the yield on 30-year treasury bond, as prior empirical studies have used both types of interest rates.

a.     Given the data, estimate the above demand function. What are the in- come and interest rate elasticities of demand for money?

b.    

t
 

Instead of estimating the above demand function, suppose you were to fit the function ( M/ Y)t = α1 r α2 eut. How would you interpret the re- sults? Show the necessary calculations.

c.     How will you decide which is a better specification? (Note: A formal statistical test will be given in Chapter 8.)

 

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Maurice Tutor
(5)
Status NEW Posted 11 Feb 2018 03:02 PM My Price 8.00

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