Problem 5.14

The Following table gives data on GNP and four definitions of the money stock for the United States for 1970-1983.

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GNP and four measures of money stock

Download :  0514.dat ,  0514.xls
 

YEAR
GNP
M1
M2
M3
L
1970
992.7
216.6
628.2
677.5
816.3
1971
1077.6
230.8
712.8
776.2
903.1
1972
1185.9
252
805.2
886
1023
1973
1326.4
265.9
861
985
1141.7
1974
1434.2
277.6
908.5
1070.5
1249.3
1975
1549.2
291.2
1023.3
1174.2
1367.9
1976
1718
310.4
1163.6
1311.9
1516.6
1977
1918.3
335.4
1286.7
1472.9
1704.7
1978
2163.9
363.1
1389.1
1647.1
1910.6
1979
2417.8
389.1
1498.5
1804.8
2117.1
1980
2631.7
414.9
1632.6
1990
2326.2
1981
2957.8
441.9
1796.6
2238.2
2599.8
1982
3069.3
480.5
1965.4
2462.5
2870.8
1983
3304.8
525.4
2193.3
2710.4
3183.1

Regressing GNP on the various definitions of money, we obtain the results shows in the following tables:

GNP-money stock regressions 1970-1983
 

1) GNPt= -787.4723 + 8.8063M1t r2 = 0.9912
(77.9664) (0.2197)
2) GNPt= -44.0626 + 1.5875M2t r2 = 0.9905
(61.0134) (0.0448)
3) GNPt= 158.1875 +1.2036M3t r2 = 0.9943
(42.9882) (0.0262)
4) GNPt= 164.2071 +1.0290Lt r2 = 0.9938
(44.7658) (0.0234)

(a) Which definition of money seems to be closely related to nominal GNP? (Hint: which
      regression(s) is/are statistically significant?) (Suggested Answer)

(b) Does that fact that high r2 for the above three regressionmean that our choice for definition of
      money does not matter? (Hint: what is the meaning of r2 ?) (Suggested Answer)

(c) To control money supply, which one of these money measures is a better target for the purpose?
     Can you tell from the regression results? (Suggested Answer)