Using the stock adjustment model (why?), estimate the short- and long-run elasticities of expenditure on new plant and equipment with respect to sales. Compare your results with those for Exercise 17.22. Which model would you choose and why? Is there serial correlation in the data? How do you know?

Data from exercise 17.22

Consider the following model:

Y^∗_i = α + β₀X_t + u_t

where Y^∗ = desired, or long-run, business expenditure for new plant and equipment, X_t = sales, and t = time. Using the stock adjustment model, estimate the parameters of the long- and short run demand function for expenditure on new plant and equipment given in the following table.

How would you find out if there is serial correlation in the data?