ECON 3498 HW7 - Assignment Example

Financial accounting Financial accounting Estimation Consider the basic VAR (p) Model. Assume that the VAR (p) model is covariance stationary, and there are no restrictions on the parameters of the model. In SUR notation, each equation in the VAR (p) may be written as yi=Zπi + ei,i=1,.,n Where yi is a (T×1) vector of observations on the ith equation, Z is a (T× k) matrix with tth row given byZ’t= (1, Y’ t−1. Y’t−p), k=np+1, πi is a (k×1)Vector of parameters and ei is a (T×1) error with covariance matrixσ2iIT.

Since the VAR (p) is in the form of a SUR modeGreen book forecasts are sufficient statistics.Green book forecast =E (yt+k|Fed Info at t) E (0.007595*36 + -0.028936018848798) =0.24448399The lag length for the VAR (p) model may be determined using model selection criteria. The general approach is to fit VAR (p) models with orders p =0,.,p max and choose the value of p which minimizes some model selection criteria. Model selection criteria for VAR (p) model shave the form IC (p)=ln | ̃Σ(p)|+ cT · φ(n, p) where Σ(p)=T−1PTt=1ˆεtˆε0t is the residual covariance matrix without a degrees of freedom correction from a VAR(p)model, cT is a sequence indexed by the sample size T ,and φ(n, p) is a penalty function which penalizes large VAR(p) models.

Question 2For the last few years, the claim that an increase in economic growth leads to an increase in inflation and that decreased growth reduces inflation. All other things being equal, an increase in economic growth must cause inflation to drop.Question 3 Under the assumption of sticky nominal wages (traditional Keynesian asymmetry), negative monetary shocks have greater real impact than positive monetary shocks. According to Ravn et al (1999), sticky nominal wages will render the aggregate supply curve convex.

In the extreme case, the aggregate supply curve is vertical at the point where the nominal wage is in equilibrium. A positive monetary shock will increase aggregate demand along the vertical segment of the aggregate supply curve leaving real economy unchanged, at least in the short run.Question 4Residuals from this regression show changes in the intended funds rate not taken in response to information about future economic developments. The resulting series for monetary shocks should be relatively free of both endogenous and anticipatory actions.

”Question 5To measure the effects of monetary policy on output it is enough that the shock is orthogonal to output forecasts. The shock does not have to be orthogonal to price, exchange rate, or other forecasts. It may be predictable from time t information; it does not have to be a shock to agents or the Fed’s entire information setReferenceRomer and Romer (2004), “A new measure of monetary shocks: derivation and implications”,American Economic Review, 94, pp.1055-1085.