Your task is to build and estimate an econometric model that might be used to estimate the relationship between government spending and household consumption. Make sure that you understand what you are going to estimate, that you include other relevant explanatory variables on top of government expenditures, and that you interpret your estimates accordingly. In case you do not trust your estimates, write why. The purpose of this assignment is to practice working with panel data. While the recent literature uses panel-VAR (vector autocorrelation) approach to model the effects of government spending (or, in general, the effects of fiscal policy), let us experiment here with simple panel data methods.

Prepare dependent and explanatory variables. How should they be measured? In nominal terms? In real terms? As percentage of GDP? As year-to-year growth/change? Maybe some of the variables should be in logs? Or maybe some variables should be lagged? Explain your choices.