To assess the impact of capacity utilization on inflation, Thomas A. Gittings obtained the following regression for the United States for the period 1971 to 1988:
Ŷt = - 30.12 + 0.1408Xt + 0.2360Xt -1
t = (- 6.27) (2.60) (4.26) R2= 0.727
where Y = GNP implicit deflator, % (a measure of the inflation rate)
Xt = Capacity utilization rate in manufacturing, %
Xt-1 = Capacity utilization rate lagged over one year
a. Interpret the preceding regression. A priori, why is there a positive relationship between inflation and capacity utilization?
b. What is the short-run impact of capacity utilization on inflation? And the long-run impact?
c. Is each slope coefficient individually statistically significant?
d. Will you reject the hypothesis that both slope coefficients are simultaneously equal to zero? Which test should you use?
e. Obtain more recent data and find out if the Gittings analysis still holds.