MSc Economics International Macroeconomics Week 7, Question 1

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28 Οκτ 2013 (πριν από 3 χρόνια και 11 μήνες)

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MSc Economics

International Macroeconomics

Week 7, Question 1

Question 1 (A)

The Structural VAR is ordered as follows:


Inflation


GDP


Fed Funds


When structured this way, shocks to FFR (e.g. an increase in rates)
will not affect inflation and GDP in the current period

VAR Model
-

Substituted Coefficients:

===============================

LNUSCPI = 1.691827373*LNUSCPI(
-
1)
-

0.6980632138*LNUSCPI(
-
2)
-

0.003641672283*LNUSGDP(
-
1) +
0.01276524149*LNUSGDP(
-
2) + 0.001517339296*FFR(
-
1)
-

0.001126735969*FFR(
-
2)
-

0.05037386818


LNUSGDP =
-

0.1302752908*LNUSCPI(
-
1) + 0.1432198375*LNUSCPI(
-
2) + 1.06372222*LNUSGDP(
-
1)
-

0.08775376507*LNUSGDP(
-
2) + 0.0008235577637*FFR(
-
1)
-

0.001708974253*FFR(
-
2) + 0.1650409067


FFR = 32.85437185*LNUSCPI(
-
1)
-

32.84682393*LNUSCPI(
-
2) + 27.65474255*LNUSGDP(
-
1)
-

27.76446871*LNUSGDP(
-
2) +
0.764388546*FFR(
-
1) + 0.1249981824*FFR(
-
2) + 1.033321276


Question 1 (A)


Eviews output


Vector Autoregression Estimates






Date: 02/24/08 Time: 14:02






Sample(adjusted): 1961:3 2005:2






Included observ ations: 176 af ter adjusting endpoints






Standard errors in ( ) & t
-
statistics in [ ]






LNUSCPI

LNUSGDP

FFR


LNUSCPI(
-
1)


1.691827

-
0.130275


32.85437




(0.05675)


(0.11709)


(21.3061)



[ 29.8097]

[
-
1.11260]

[ 1.54202]







LNUSCPI(
-
2)

-
0.698063


0.143220

-
32.84682




(0.05567)


(0.11485)


(20.8986)



[
-
12.5396]

[ 1.24700]

[
-
1.57173]







LNUSGDP(
-
1)

-
0.003642


1.063722


27.65474




(0.03544)


(0.07311)


(13.3033)



[
-
0.10277]

[ 14.5495]

[ 2.07878]







LNUSGDP(
-
2)


0.012765

-
0.087754

-
27.76447




(0.03490)


(0.07200)


(13.1016)



[ 0.36577]

[
-
1.21877]

[
-
2.11917]







FFR(
-
1)


0.001517


0.000824


0.764389




(0.00021)


(0.00044)


(0.07945)



[ 7.16939]

[ 1.88612]

[ 9.62075]







FFR(
-
2)

-
0.001127

-
0.001709


0.124998




(0.00022)


(0.00045)


(0.08261)



[
-
5.12029]

[
-
3.76429]

[ 1.51311]







C

-
0.050374


0.165041


1.033321




(0.02281)


(0.04706)


(8.56313)



[
-
2.20840]

[ 3.50703]

[ 0.12067]



R
-
squared


0.999971


0.999682


0.850505



Adj. R
-
squared


0.999970


0.999670


0.845198



Sum sq. resids


0.002092


0.008904


294.8265



S.E. equation


0.003518


0.007259


1.320809



F
-
statistic


960591.6


88481.39


160.2458



Log likelihood


748.1982


620.7356

-
295.1326



Akaike AIC

-
8.422707

-
6.974268


3.433325



Schwarz SC

-
8.296608

-
6.848169


3.559424



Mean dependent


4.410224


8.636031


6.271875



S.D. dependent


0.638510


0.399863


3.357000



Determinant Residual Cov ariance



9.72E
-
10




Log Likelihood (d.f. adjusted)



1076.944




Akaike Inf ormation Criteria


-
11.99936




Schwarz Criteria


-
11.62106



Question 1 (B)


VAR with Commodity Prices included


LNUSCPI

LNUSGDP

FFR

LNCOMPRICE


LNUSCPI(
-
1)


1.481869

-
0.368529

-
33.09176


1.400836




(0.06637)


(0.14446)


(25.2400)


(1.02855)



[ 22.3291]

[
-
2.55113]

[
-
1.31108]

[ 1.36195]








LNUSCPI(
-
2)

-
0.500667


0.367972


29.69308

-
1.395681




(0.06408)


(0.13949)


(24.3723)


(0.99319)



[
-
7.81275]

[ 2.63797]

[ 1.21832]

[
-
1.40526]








LNUSGDP(
-
1)

-
0.027740


1.033963


18.35919


0.538966




(0.03343)


(0.07276)


(12.7129)


(0.51806)



[
-
0.82987]

[ 14.2106]

[ 1.44414]

[ 1.04036]








LNUSGDP(
-
2)


0.044238

-
0.050074

-
16.47289

-
0.536243




(0.03311)


(0.07208)


(12.5943)


(0.51323)



[ 1.33590]

[
-
0.69468]

[
-
1.30796]

[
-
1.04484]








FFR(
-
1)


0.001277


0.000546


0.685222

-
0.004429




(0.00020)


(0.00044)


(0.07700)


(0.00314)



[ 6.30684]

[ 1.23805]

[ 8.89911]

[
-
1.41145]








FFR(
-
2)

-
0.000973

-
0.001498


0.199358


0.000892




(0.00021)


(0.00046)


(0.08025)


(0.00327)



[
-
4.61008]

[
-
3.26140]

[ 2.48436]

[ 0.27264]








LNCOMPRICE(
-
1)


0.011456


0.016885


6.377814


1.322609




(0.00489)


(0.01065)


(1.86141)


(0.07585)



[ 2.34069]

[ 1.58496]

[ 3.42633]

[ 17.4363]








LNCOMPRICE(
-
2)

-
0.003180

-
0.007970

-
4.119064

-
0.334379




(0.00512)


(0.01114)


(1.94623)


(0.07931)



[
-
0.62133]

[
-
0.71549]

[
-
2.11643]

[
-
4.21608]








C

-
0.090975


0.121318

-
10.03786


0.013596




(0.02288)


(0.04979)


(8.70009)


(0.35453)



[
-
3.97695]

[ 2.43642]

[
-
1.15377]

[ 0.03835]


Question 1 (B)
-

Conclusions


Adding the commodity price to the VAR has a significant impact on CPI in relation
to the previous estimate. The profile now looks more reasonable, i.e. inflation falls
in response to tighter monetary policy.


This could be due to commodities weighting in the CPI index. Tighter monetary
policy seems to have a negative relationship with commodity prices. Thus, this
should have a downward influence on inflation.



Question 1 (C1)


FFR Impact on the exchange rate


The structural VAR is ordered as follows:


1.
USCPI

2.
USGDP

3.
FED FUNDS

4.
COMMODITY PRICES

5.
EXCHANGE RATE

6.
UK TERMS OF TRADE

7.
UK NET TRADE

8.
UK RPIX

9.
UKGDP

10.
UKTBILL


VAR Model
-

Substituted Coef f icients:

===============================

LNUSCPI = 1.348871695*LNUSCPI(
-
1)
-

0.3914013529*LNUSCPI(
-
2)
-

0.01230689248*LNUSGDP(
-
1) + 0.03849480559*LNUSGDP(
-
2) + 0.0014422
62678*FFR(
-
1)
-

0.0009047567*FFR(
-
2) + 0.0145611322*LNCOMPRICE(
-
1)
-

0.01091170826*LNCOMPRICE(
-
2) + 0.008063635792*S(
-
1)
-

0.01352451854*S(
-
2) + 0.0418644246*UKTERMSOFTRADE(
-
1)
-

0.04767811486*UK
TERMSOFTRADE(
-
2)
-

1.917725356e
-
07*UKNETTRADE(
-
1) +
1.119850673e
-
07*UKNETTRADE(
-
2) + 0.0408517177*LUKRPIX(
-
1)
-

0.02492080664*LUKRPIX(
-
2) + 0.01139903386*LUKGDP(
-
1)
-

0.01162403355
*LUKGDP(
-
2) + 0.0005675377704*UKTBILL(
-
1)
-

0.0003086253088*UKTBILL(
-
2)
-

0.1131801331


LNUSGDP =
-

0.3223208462*LNUSCPI(
-
1) + 0.2799333182*LNUSCPI(
-
2) + 0.9138208219*LNUSGDP(
-
1)
-

0.01060493461*LNUSGDP(
-
2) + 0.0006
943965013*FFR(
-
1)
-

0.001629258657*FFR(
-
2) +
0.00920700888*LNCOMPRICE(
-
1)
-

0.006072719048*LNCOMPRICE(
-
2) + 0.03635421322*S(
-
1)
-

0.02063380306*S(
-
2) + 0.07040940128*UKTERMS
OFTRADE(
-
1)
-

0.02016829312*UKTERMSOFTRADE(
-
2) + 2.268259061e
-
07*UKNETTRADE(
-
1) + 1.349286279e
-
07*UKNETTRADE(
-
2) + 0.07703936536*LUKRPIX(
-
1)
-

0.04201289819*LUKRPIX(
-
2) + 0.1254662759*LUKGDP
(
-
1)
-

0.02241975695*LUKGDP(
-
2) + 0.0001583793567*UKTBILL(
-
1)
-

0.0003705526771*UKTBILL(
-
2)
-

0.3689253727


FFR =
-

49.28779901*LNUSCPI(
-
1) + 42.27191504*LNUSCPI(
-
2) + 21.51514706*LNUSGDP(
-
1)
-

7.143248623*LNUSGDP(
-
2) + 0.5935480029*FF
R(
-
1) + 0.2122752746*FFR(
-
2) + 7.506042879*LNCOMPRICE(
-
1)
-

3.315245984*LNCOMPRICE(
-
2)
-

3.2645823*S(
-
1) + 2.666568094*S(
-
2) + 4.352712619*UKTERMSOFTRADE(
-
1) + 3.418624286*UKTERMSOFTRADE(
-
2) + 0.000157381748*UKNETTRADE(
-
1)
-

0.0001884086354*UKNETTRADE(
-
2)
-

2.213159049*LUKRPIX(
-
1) + 2.104193204*LUKRPIX(
-
2)
-

7.183925024*LUKGDP(
-
1)
-

4.906323214*LUKGDP
(
-
2)
-

0.08650880122*UKTBILL(
-
1) + 0.1381741296*UKTBILL(
-
2) +
36.44809884


LNCOMPRICE = 2.302401252*LNUSCPI(
-
1)
-

2.702905244*LNUSCPI(
-
2)
-

0.3599097683*LNUSGDP(
-
1)
-

0.4498151646*LNUSGDP(
-
2)
-

0.0053372
22801*FFR(
-
1) + 0.0006130417532*FFR(
-
2) +
1.190432274*LNCOMPRICE(
-
1)
-

0.28895531*LNCOMPRICE(
-
2) + 0.06967526184*S(
-
1) + 0.01772405939*S(
-
2)
-

0.1816390469*UKTERMSOFTRADE
(
-
1) + 0.4238135983*UKTERMSOFTRADE(
-
2)
-

1.74585278e
-
06*UKNETTRADE(
-
1) + 7.619151668e
-
06*UKNETTRADE(
-
2)
-

0.4080043159*LUKRPIX(
-
1) + 0.7449591802*LUKRPIX(
-
2) + 1.258300487*LUKGDP(
-
1
)
-

0.1374127435*LUKGDP(
-
2) + 0.008517353541*UKTBILL(
-
1)
-

0.005213726313*UKTBILL(
-
2)
-

5.789238534


S =
-

0.8805616073*LNUSCPI(
-
1) + 0.8490363426*LNUSCPI(
-
2) + 0.2866862984*LNUSGDP(
-
1)
-

0.09311824769*LNUSGDP(
-
2) + 0.0012299852
98*FFR(
-
1) + 0.002010354773*FFR(
-
2)
-

0.009192297949*LNCOMPRICE(
-
1)
+ 0.01931786396*LNCOMPRICE(
-
2) + 1.070997688*S(
-
1)
-

0.2070173218*S(
-
2)
-

0.192972468*UKTERMSOFTRADE(
-
1) + 0.0872721631*UKTERMSO
FTRADE(
-
2)
-

2.62558194e
-
06*UKNETTRADE(
-
1) + 5.186676249e
-
07*UKNETTRADE(
-
2) + 0.09407586933*LUKRPIX(
-
1)
-

0.06217734767*LUKRPIX(
-
2)
-

0.4501603266*LUKGDP(
-
1) + 0.152699043*LUKGDP(
-
2)
-

0
.008258439619*UKTBILL(
-
1) + 0.005320028504*UKTBILL(
-
2) + 1.968079035


UKTERMSOFTRADE = 0.458740467*LNUSCPI(
-
1)
-

0.4820788842*LNUSCPI(
-
2)
-

0.02413136436*LNUSGDP(
-
1)
-

0.01883139133*LNUSGDP(
-
2)
-

0.
000234321112*FFR(
-
1)
-

5.873553586e
-
05*FFR(
-
2)
-

0.07125190849*LNCOMPRICE(
-
1) + 0.05630918763*LNCOMPRICE(
-
2)
-

0.008452373739*S(
-
1) + 0.002266932784*S(
-
2) + 1.145431441*UKTERMSO
FTRADE(
-
1)
-

0.2080611881*UKTERMSOFTRADE(
-
2)
-

2.527291722e
-
07*UKNETTRADE(
-
1) + 7.661851871e
-
08*UKNETTRADE(
-
2) + 0.07357808381*LUKRPIX(
-
1)
-

0.03687923882*LUKRPIX(
-
2) + 0.133460291*LUKGDP(
-
1)
-

0.1108583171*LUKGDP(
-
2)
-

0.001872877381*UKTBILL(
-
1) +
0.001277201053*UKTBILL(
-
2) + 0.1197593384


UKNETTRADE = 55899.14933*LNUSCPI(
-
1)
-

51308.73031*LNUSCPI(
-
2)
-

709.2652343*LNUSGDP(
-
1) + 5850.551034*LNUSGDP(
-
2)
-

88.32899176
*FFR(
-
1)
-

96.89951042*FFR(
-
2)
-

499.0719449*LNCOMPRICE(
-
1) +
1471.422221*LNCOMPRICE(
-
2) + 5180.760846*S(
-
1)
-

1950.307469*S(
-
2)
-

3724.166906*UKTERMSOFTRADE(
-
1) + 4783.83805*UKTERMSOFTRADE(
-
2) + 0.5919792717*UKNETTRADE(
-
1) +
0.3551553496*UKNETTRADE(
-
2)
-

4709.953999*LUKRPIX(
-
1) + 968.0130649*LUKRPIX(
-
2)
-

11472.4754*LUKGDP(
-
1) + 2375.11123*LUKGDP(
-
2)
+ 42.94953206*UKTBILL(
-
1) + 50.02042575*UKTBILL(
-
2) + 54449.3538


LUKRPIX = 0.8882041486*LNUSCPI(
-
1)
-

0.8335419115*LNUSCPI(
-
2)
-

0.06551536712*LNUSGDP(
-
1)
-

0.04770422206*LNUSGDP(
-
2)
-

0.000944
4956945*FFR(
-
1)
-

3.219783348e
-
05*FFR(
-
2) +
0.0276571887*LNCOMPRICE(
-
1)
-

0.02046480705*LNCOMPRICE(
-
2) + 0.1172803059*S(
-
1)
-

0.1080359058*S(
-
2) + 0.108937154*UKTERMSOFTRAD
E(
-
1)
-

0.1453125821*UKTERMSOFTRADE(
-
2) + 1.03920604e
-
06*UKNETTRADE(
-
1) + 3.911071052e
-
07*UKNETTRADE(
-
2) + 0.8795076656*LUKRPIX(
-
1) + 0.06753557911*LUKRPIX(
-
2) + 0.1103149307*LUKGDP(
-
1) + 0.06856251634*LUKGDP(
-
2) + 0.001397865159*UKTBILL(
-
1) +
0.000776500158*UKTBILL(
-
2)
-

1.240796257


LUKGDP =
-

0.2114868525*LNUSCPI(
-
1) + 0.1963936611*LNUSCPI(
-
2) + 0.1243537608*LNUSGDP(
-
1)
-

0.01756761823*LNUSGDP(
-
2)
-

0.00040
38710547*FFR(
-
1) + 3.426935758e
-
05*FFR(
-
2) +
0.01413443408*LNCOMPRICE(
-
1)
-

0.01135773256*LNCOMPRICE(
-
2) + 0.008915688338*S(
-
1) + 0.006685063127*S(
-
2)
-

0.07088501263*UKTERM
SOFTRADE(
-
1) + 0.05899293828*UKTERMSOFTRADE(
-
2)
-

2.24750405e
-
06*UKNETTRADE(
-
1) + 1.988081379e
-
06*UKNETTRADE(
-
2) + 0.0244808365*LUKRPIX(
-
1)
-

0.01960288989*LUKRPIX(
-
2) + 0.7203637267*LUKGDP(
-
1) + 0.1350266946*LUKGDP(
-
2) + 0.0005122786587*UKTBILL(
-
1)
-

0.001478094629*UKTBILL(
-
2) + 0.8659486053


UKTBILL =
-

28.32088553*LNUSCPI(
-
1) + 23.99767059*LNUSCPI(
-
2)
-

5.759981667*LNUSGDP(
-
1) + 9.145599609*LNUSGDP(
-
2) + 0.119461375
8*FFR(
-
1) + 0.0007021241202*FFR(
-
2) + 3.264854237*LNCOMPRICE(
-
1)
-

1.394208828*LNCOMPRICE(
-
2) + 1.849983103*S(
-
1)
-

0.7951007456*S(
-
2) + 4.934081151*UKTERMSOFTRADE(
-
1)
-

3.56999219*UKTERMSOFTRADE
(
-
2)
-

0.0001433648768*UKNETTRADE(
-
1) + 6.02111225e
-
05*UKNETTRADE(
-
2) + 7.629819067*LUKRPIX(
-
1)
-

6.488062373*LUKRPIX(
-
2)
-

3.560326873*LUKGDP(
-
1) + 0.3851952355*LUKGDP(
-
2) + 1.045
223239*UKTBILL(
-
1)
-

0.2539929088*UKTBILL(
-
2) + 16.00963562


Question 1 VAR Output

Question 1 (C1)


FFR Impact on the exchange rate


Exchange rate is defined as £ to $. Therefore s↑ implies sterling weakening
(dollar strengthening)


A foreign monetary contraction causes the exchange rate to rise (equation (15) in
the lecture notes), so the IRF here seems intuitive.


Question 1 (C2)


FFR impact on the UK External Sector


The terms of trade defined as price of domestically produced goods minus
imported goods, sees a deterioration, with a full recovery taking some time. This
would be consistent with the FX move in the previous question.


Net trade also deteriorates as foreign imports become more expensive, again this
is consistent with the move on FX in the previous question

Question 1 (C3)


FFR impact on the UK output


For UK output, the IRF of a positive shock to FFR is initially positive and then
negative.



Expenditure switching, defined as switching to home produced goods as foreign
goods become more expensive, does not seem to occur here. If this were the
case, we would expect to see UK output increase as consumption of home goods
rises.

Question 1 (D)


is there evidence of LCP?


The results of sections C(1
-
3) suggest the data does support the theory of local
currency pricing.


The response of the exchange rate, from a shock to the FFR is positive. The
exchange rates impact on other variables is how we determine if LCP is present.


The evidence on UK net trade which saw a decrease when the exchange rate
increased would support the idea the idea that LCP is present. This is because
net trade fell. Imports did not fall as they became more expensive, and exports did
not increase as they became cheaper.


The evidence from the impact of FFR on UK output would also support LCP. If
LCP was not present, then output would increase as the exchange rate increased.
i.e. there would be evidence of expenditure switching.