Suppose someone convinces you that the relationship between business expenditure for new plant and equipment and sales is as follows:

where Y^ˆ— is desired expenditure and X^ˆ— is desired or expected sales. Use the data given in Exercise 17.22 to estimate this model and comment on your results.

Data from exercise 17.22

Consider the following model:

Y^ˆ—_i = α + β₀X_t + u_t

where Y^ˆ— = 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?

Transcribed Image Text:

Y; = a + BX; + u, Year Plant Expenditure, Y Sales, X2 Year Plant Expenditure, Y Sales, X2 1970 36.99 52.805 1981 128.68 168.129 1971 33.60 55.906 1982 123.97 163.351 1972 35.42 63.027 1983 117.35 172.547 1973 42.35 72.931 1984 139.61 190.682 1974 52.48 84.790 1985 152.88 194.538 1975 53.66 86.589 1986 137.95 194.657 1976 58.53 98.797 1987 141.06 206.326 1977 67.48 113.201 1988 163.45 223.541 1978 78.13 126.905 1989 183.80 232.724 95.13 112.60 1979 143.936 1990 192.61 239.459 1980 154.391 1991 182.81 235.142