Refer to Table 8 11, which gives data on personal savings (Y) and personal disposable income (X) for the period 19702005 Now consider the following models Model A Y t 1 2 X t 3 X t1 u t Model B Y t 1 2 X t 3 Y t1 u t a How would you choose between these two models State clearly the test procedure(s...

a The difference between Model 1 and Model 2 in Exercise 719 is that there is one additional e ...

Refer to Table 8.11, which gives data on personal savings (Y) and personal disposable income (X) for

Question:

Refer to Table 8.11, which gives data on personal savings (Y) and personal disposable income (X) for the period 1970â€“2005. Now consider the following models:

Year Savings Income 1970 69.5 80.6 77.2 735.7 801.8 1971 1972 869.1 1973 102.7 978.3 113.6 1974 1,071.6 1,187.4 1,302.5

Model A: Y_t = Î±₁ + Î±₂X_t + Î±₃X_tâˆ’1 + u_t

Model B: Y_t = Î²₁ + Î²₂X_t + Î²₃Y_tâˆ’1 + u_t

a. How would you choose between these two models? State clearly the test procedure(s) you use and show all the calculations. Suppose someone contends that the interest rate variable belongs in the savings function. How would you test this?

b. Collect data on the 3-month treasury bill rate as a proxy for the interest and demonstrate your answer.