In his classic study Distributed Lags and Investment Analysis (1954), Koyck investigated the relationship between investment in railcars and the volume of freight carried on the U.S. railroads using data for the period 1884–1939. Assuming that the desired stock of railcars in year t depended on the volume of freight in year t–1 and year t–2 and a time trend, and assuming that investment in railcars was subject to a partial adjustment process, he fitted the following regression equation using OLS (standard errors and constant term not reported):

Provide an interpretation of the equation and describe the dynamic process implied by it.

 

Transcribed Image Text:

Î, = 0.077 F- + 0.017F-0.0033t – 0.110K-1 R = 0.85 %3D 1-2 Î, = 0.077 F- + 0.017F-0.0033t – 0.110K-1 R = 0.85 %3D 1-2

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The equation states that on average a 1 increase in the volume of freight carried on the rail roads ... View the full answer