Let gGDPt denote the annual percentage growth of GDP and intt denote short term interest rate. Suppose we want to estimate:gGDPt = 0 + 0intt + 1intt1…

Let gGDPt denote the annual percentage growth of GDP and intt denote short term interest rate. Suppose we want to estimate:gGDPt = α0 + δ0intt + δ1intt−1 + utwhere E[ut|intt, intt−1] = 0. If the federal reserve operates under the rule:intt = γ0 + γ1(gGDPt−1 − 3) + vtwhere γ1 > 0 in adjusting interest rates, show that strict exogeneity is violated.(Try lagging one of the equations and substituting values.)

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