Consider the following simple macroeconomic model for the U.S. economy, say, for the period 1960?1999.

Private consumption function:

Private gross investment function:

A money demand function:

Income identity:

Y_t = C_t + I_t + G_t

where C = real private consumption; I = real gross private investment, G = real government expenditure, Y = real GDP, M = M₂ money supply at current prices, R = long-term interest rate (%), and P = Consumer Price Index. The endogenous variables are C, I, R, and Y. The predetermined variables are: C_t?1, I_t?1, M_t?1, P_t, R_t?1, and G_t plus the intercept term. The u?s are the error terms.

a. Using the order condition of identification, determine which of the four equations are identified, either exact or over-.

b. Which method(s) do you use to estimate the identified equations?

c. Obtain suitable data from government and/or private sources, estimate the model, and comment on your results.

Transcribed Image Text:

C₁ = αo +α₁Y₁ + a₂C₁_1 + U₁₁ α₁ > 0,0 I₁ = Bo + B₁Y₁ + B2 R₁ + B3I₁−1+U2₁ B₁ > 0, B₂ <0, 0 R = λ + λ Y + 12 M–1 + 23P + 24 R1–1 + u3 λι > 0, kg < 0, 13 > 0, 0 < λ4 < 1