Example 211

M1 MONTHLY MONEY SUPPLY IN THE UNITED STATES, JANUARY 1951 TO SEPTEMBER 30, 1999

Figure 21.10 shows the M1 money supply for the United States from January 1951 to September 30, 1999. From our knowledge of stationarity, it seems that the M1 money supply time series is nonstationary, which can be confirmed by unit root analysis. (Note: to save space, we have not given the actual data, which can be obtained from the Federal Reserve Board

FIGURE 21.10 U.S. money supply over 1951:01 to 1999:09.

(Continued)

48S. G. Hall, "An Application of the Granger and Engle Two-Step Estimation Procedure to the United Kingdom Aggregate Wage Data," Oxford Bulletin of Economics and Statistics, vol. 48, no. 3, August 1986, p. 238. See also John Y. Campbell and Pierre Perron, "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," NBER (National Bureau of Economic Research) Macroeconomics Annual 1991, pp. 141-219.

Models

Econometrics: Some Basic Concepts

CHAPTER TWENTY-ONE: TIME SERIES ECONOMETRICS: SOME BASIC CONCEPTS 827

EXAMPLE 21.1 (Continued)

or the Federal Reserve Bank of St. Louis.)

The 1, 5, and 10 percent critical t values are -3.9811, -3.4210, and -3.1329. Since the t value of -3.0046 is less negative than any of these critical values, the conclusion is that the M1 time series is nonstationary; that is, it contains a unit root or it is /(1). Even when several lagged values of AMt (a la ADF) were introduced, the conclusion did not change. On the other hand, the first differences of the M1 money supply were found to be stationary (check this out).

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