Project II Troy Dewitt Emelia Bragadottir Christopher Wilderman Qun Luo Dane Louvier.
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Transcript of Project II Troy Dewitt Emelia Bragadottir Christopher Wilderman Qun Luo Dane Louvier.
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Project II
Troy DewittEmelia Bragadottir
Christopher WildermanQun Luo
Dane Louvier
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Scope of analysis
• Does monetary policy affect the U.S. Economy?• What is going to be the status of U.S. economy
upon graduation – will we be able to get a job?• Will inflationary pressures force the Federal
Reserve to raise the interest rate?• Use univariate model to forecast the federal fund
rates• Use univariate model to forecast the
unemployment rate• If causality exists between the two variables use
a VAR model to forecast the data
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2007
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UNEMPLOYMENT FFR
Trace Unemployment Rate and Federal Funds Rate - It appears that changes in the unemployment rate lag changes in the federal funds rate
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Correlogram for FFR Correlogram for Unemployment
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Both time series have a unit root – Meaning we have to difference the data to eliminate the data’s dependence on time
ADF Test Statistic -3.230898 1% Critical Value* -3.4432
5% Critical Value -2.8665
10% Critical Value -2.5694
ADF Test Statistic -1.543935 1% Critical Value* -3.4432
5% Critical Value -2.8664
10% Critical Value -2.5694
FFR - only at 1% level
Unemployment rate
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Differenced Time Series
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Correlogram of differenced FFRCorrelogram of differenced
unemployment rate
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Unit Root Test
dFFR
dUnemployment rate
ADF Test Statistic -8.295159 1% Critical Value* -3.4432
5% Critical Value -2.8665
10% Critical Value -2.5694
ADF Test Statistic -16.43205 1% Critical Value* -3.4432
5% Critical Value -2.8665
10% Critical Value -2.5694
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Univariate ARMA Output
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Correlogram of ResidualsdFederal Funds Rate dUnemployment Rate
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Correlogram of Residauls SquareddFederal Funds Rate dUnemployment Rate
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ARCH LM TestdFederal Funds Rate dUnemployment Rate
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ARCH GARCH ModeldFederal Funds Rate dUnemployment Rate
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Actual Fitted Residual GraphsdFederal Funds Rate dUnemployment Rate
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Correlogram of ResidualsdFederal Funds Rate dUnemployment Rate
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Correlogram of Residuals Squared
dFederal Funds Rate dUnemployment Rate
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Forecasts of Univariate Models
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Causality
Does the unemployment rate Granger cause the federal funds rate?
Does the federal funds rate Granger cause the unemployment rate?
Is there two-way causality between these two variables?
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Cross Correlogram: Differenced Unemployment Rate and Differenced Federal Funds Rate (Evidence of Two-Way Causality)
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Granger Causality Test
Pairwise Granger Causality Tests
Date: 05/31/07 Time: 15:10
Sample: 1954:07 2007:12
Lags: 24
Null Hypothesis: Obs F-Statistic Probability
DFEDFUNDS does not Granger Cause DUNEMPLOYMENT
609 2.14998 0.00129
DUNEMPLOYMENT does not Granger Cause DFEDFUNDS 2.94100 4.7E-06
Both variables are significant, however the unemployment rate is more significant
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Funds Unemployment
Funds 1, 2, 4, 7, 8, 9, 13, 16 7, 11, 18, 22Unemployment 1 2, 3, 4, 12, 15, 19, 24
Summary of Significant Lags of Vector Autoregressive Estimates
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Impulse Response VAR Estimates (Unemployment appears to have significant effects on the Federal Funds rate for five months)
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Impulse Response VAR Estimates (Federal Funds rate has an insignificant effect on the unemployment rate)
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Test of the models ability to accurately forecast Apr 06 – Apr 07
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Test of the models ability to accurately forecast Apr 06 – April 07
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VAR Forecast May 07 – Dec 07
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VAR forecast of May 07 – Dec 07
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Forecast Comparison
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Questions?