Use the data in Exercise 13.28.To familiarize yourself with recursive least squares, estimate the savings functions for

Question:

Use the data in Exercise 13.28.To familiarize yourself with recursive least squares, estimate the savings functions for 1970€“1981, 1970€“1985, 1970€“1990, and 1970€“1995. Comment on the stability of estimated coefficients in the savings functions.

Data from exercise 12.28

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

Model A: Yαι+αχ + a X_1+u Model B: Υ- β+ β, X + βY +u,

Year Savings Income 1970 69.5 735.7 1971 80.6 801.8 1972 869.1 77.2 102.7 113.6 1973 978.3 1,071.6 1,187.4 1,302.5 1,435

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