To assess the effect of the Fed€™s policy of deregulating interest rates beginning in July 1979, Sidney Langer, a student of mine, estimated the following model for the quarterly period of 1975€“III to 1983€“II.

Where

Y = 3-month Treasury bill rate

P = expected rate of inflation

Un = seasonally adjusted unemployment rate

M = changes in the monetary base

Dum = dummy, taking value of 1 for observations beginning July 1, 1979

a. Interpret these results.

b. What has been the effect of interest rate deregulation? Do the results make economic sense?

c. The coefficients of P_t , U_nt, and M_t are negative. Can you offer an economic rationale?

Transcribed Image Text:

Î, = 8.5871 se = (1.9563) 0.1328P, – 0.7102Un, – 0.2389M, (0.0992) (0.0727) (0.1909) + 0.6592Y,–1 + 2.5831Dum, R² = 0.9156 (0.1036) (0.7549)