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Accounting, Finance, SPSS
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English (U.S.)
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Topic:

The Impact of Money Supply on 90-Day US Treasury Bills

Essay Instructions:

Develop a simple linear regression model using one independent variable to explain the short-term, “risk-free” rate or yield (i.e., 90-day U.S. Treasury bill) dependent variable. Use monthly data over a recent U.S. business cycle (e.g., 2002 to 2019). Provide an overview of the paper. State and justify the null and directional (when warranted) alternative hypothesis for the model. Consider selecting one independent variable from among monetary, fiscal, economic, financial, political, demographic and/or another factor you believe relevant. Do not use another interest rate as an independent variable for the first regression model. If your variable increases with time, such as the Consumer Price Index or the Money Supply, change the metric to an annual percent change from the prior year. Is the variable tested significant and consistent with the alternative hypothesis or merely “noise” in the market?
Compare (e.g., T-statistic, R-square, SER) the first simple regression model with a second model evaluating the same period of time (except for three-month lag) and same dependent variable using the implied three-month forward rate of interest computed by pure expectations (lagged three months) as the independent variable. Evaluate the term structure hypothesis best supported by the results of the second model to include the intercept and slope. Do your results support liquidity preference or pure expectations? Why?
Ensure you provide and assess simple or descriptive data for all dependent and independent variables used in the two regressions to include the three-month T-bill and independent variable selected for the first model and the three-month, six-month and forward T-bill rates derived for the second model. Present your findings in a report of approximately five pages (excluding tables, statistical output and/or graphs). Briefly provide a context of the economic and financial environment for the variables tested.

Essay Sample Content Preview:

The Impact of Money Supply on 90-Day US Treasury Bills
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The Impact of Money Supply on 90-Day US Treasury Bills
1.0 Introduction
The interaction between money supply and Treasury bills in the US cannot be ignored since both affect each other. The US Federal Reserve often conducts open market operations (OMOs) to control the money supply. This involves buying or selling bonds and other securities. This study seeks to run a regression model to determine the impact of money supply on the 90-day US Treasury bill (Nyberg, 2012). The Fed may have different objectives while limiting or releasing the money into the economy.
This analysis is divided into the following sections: section one is the introduction. Section two represents the hypothesis. Section three represents the methodology applied, while section four represents the results and section five gives the conclusion.
2.0 Hypothesis Testing
H0: Money supply does not affect the 90-day Treasury bill
H1: Money supply affects the 90-day US Treasury bill.
3.0 Methodology
The study applies the simple regression analysis model to determine the impact of money supply on the 90-day US Treasury bill. The paper presents two models. Model 1 will regress the 90-day US Treasury bill against the money supply, i.e., the 90- day US Treasury bill is the dependent variable. In contrast, the money supply is taken as the independent variable. Model 2 will be analyzed using the lagged values of the money supply.
4.0 Results
Table 1: Descriptive statistics

M2_PCA

TB3MS

Mean

5.436604

2.703806

Median

5.72716

2.529167

Maximum

8.65616

7.493333

Minimum

1.02359

0.0325

Std. Dev.

2.105244

2.216995

Skewness

-0.593345

0.26465

Kurtosis

2.537743

1.83632

Jarque-Bera

2.027391

2.04289

Probability

0.362875

0.360074

Sum

163.0981

81.11417

Sum Sq. Dev.

128.5295

142.5369

Observations

30

30

Source: Author's computation using E-view software version 10
From the above table 1, the mean value of money supply is 5.4366, and the standard deviation is 2.1052. The minimum value is 1.0236, while the maximum value is 8.6562. The mean value for the US Treasury bill is 2.7038, and the standard deviation is 2.2170. The minimum value is 0.0325, while the maximum value is 7.4933. The money supply is negatively skewed as the skewness value is -0.5934, while the Treasury bill is positively skewed since the skewness value is 0.2647. The number of observations for the two variables is 30 with no missing item.
Model 1
Table 2: Regression analysis results of Treasury bill with the money supply
Variable

Coefficient

Std. Error

t-Statistic

Probability

M2_PCA

0.39506

0.083119

4.752946

0.0001

R-squared

-0.427033

Mean dependent var


2.703806

Adjusted R-squared

-0.427033

SD depend...
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