Using the data given in Exercise 17.22, determine whether plant expenditure Granger-causes sales or whether sales Granger-cause

Question:

Using the data given in Exercise 17.22, determine whether plant expenditure Granger-causes sales or whether sales Granger-cause plant expenditure. Use up to six lags and comment on your results. What important conclusion do you draw from this exercise?

Data from exercise 17.22

Consider the following model:

Y^ˆ—_i = Î± + Î²₀X_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.

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