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Problem Statement: 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.
Question: Think about the relationship that you are going to estimate. Why government spending might affect household consumption? Is this relationship expected to be linear? Is this relationship expected to be immediate? What other factors might influence household consumption? Build a regression equation based on this discussion.
Why might it be difficult for the Fed to formally adopt inflation targeting? Would inflation targeting be a good policy for the Fed in the present economic environment
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