Suppose you use a time series sample covering 34 years and estimate the following multiple regression model of investment demand:

I _t = ß̂ ₀ + ß̂ ₁ Q ₁ +ß̂ ₂ R _t +ß̂ ₃ TR _t +e _t

Where (I)is the investment in real capital, (Q) is output, (R) is the long-term interest rate, (Tr) is the corporate tax rate. and (e) is the residual. You obtain the results reported on the attached sheet.

Suppose the model were recast in such a manner that we took the natural log of the explanatory variables, and applied OLS to the same sample. We obtain the following results:

In(l _t ) = -12.1 + 1 .1 I(Q _t )- 0.1In(R _t ) - 0.07In(Tr _t )+ε _t

R ² = 0.99, F=1350

Required:

1. what is the interpretation of the coefficient on In(Qt)')
2. Does this specification allow you to rank the influence of each independent variable on the dependent variable?

Answer rating: 100% (QA)

1 Coefficient of lnQt is 11 It means that when output increases by 1 i... View the full answer