Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 1

In October 1979, the Federal Reserve changed its policy of targeting the money supply and instead began to focus directly on short-term interest rates. Using the data in INTDEF.RAW, define a dummy variable equal to 1 for years after 1979. Include this dummy in equation (10.15) to see if there is a shift in the interest rate equation after 1979. What do you conclude?

Step 1 of 2

The interest rate regression model based on the functional form is given by:

Where,,and

When a dummy variable equals to 1 is introduced for the time period after 1979, the regression model is given by:

Hence, the regression model becomes:

Where,,and