sa1 by linzhengnd

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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                                               Response to Cholesky One S.D. Innovations ± 2 S.E.
Sample(adjusted): 1961:3 2005:2
                                                                                         Response of LNUSCPI to FFR
Included observations: 176 after adjusting endpoints
                                                                             .020
Standard errors in ( ) & t-statistics in [ ]

                         LNUSCPI               LNUSGDP      FFR              .016
LNUSCPI(-1)               1.691827             -0.130275     32.85437
                          (0.05675)             (0.11709)    (21.3061)
                         [ 29.8097]            [-1.11260]   [ 1.54202]
                                                                             .012
LNUSCPI(-2)              -0.698063              0.143220    -32.84682
                          (0.05567)             (0.11485)    (20.8986)
                         [-12.5396]            [ 1.24700]   [-1.57173]       .008
LNUSGDP(-1)              -0.003642              1.063722     27.65474
                          (0.03544)             (0.07311)    (13.3033)
                         [-0.10277]            [ 14.5495]   [ 2.07878]
                                                                             .004

LNUSGDP(-2)               0.012765             -0.087754    -27.76447
                          (0.03490)             (0.07200)    (13.1016)       .000
                         [ 0.36577]            [-1.21877]   [-2.11917]               2   4   6   8   10   12   14   16   18   20
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                    Response of LNUSGDP to FFR
                          (0.00022)             (0.00045)    (0.08261)       .004
                         [-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]       .000
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        -.004
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        -.008
Mean dependent        4.410224                  8.636031     6.271875
S.D. dependent        0.638510                  0.399863     3.357000
Determinant Residual Covariance                              9.72E-10

Log Likelihood (d.f. adjusted)                              1076.944         -.012
                                                                                     2   4   6   8   10   12   14   16   18   20
Akaike Information Criteria                                 -11.99936

Schwarz Criteria                               -11.62106
              Question 1 (B) – VAR with Commodity Prices included
                                                                     Response to Cholesky One S.D. Innovations ± 2 S.E.

                                                                                       Response of LNUSCPI to FFR
                 LNUSCPI      LNUSGDP      FFR          LNCOMPRICE
                                                                         .008
LNUSCPI(-1)      1.481869     -0.368529    -33.09176    1.400836

                 (0.06637)    (0.14446)    (25.2400)    (1.02855)        .004

                 [ 22.3291]   [-2.55113]   [-1.31108]   [ 1.36195]
                                                                         .000

                                                                         -.004
LNUSCPI(-2)      -0.500667    0.367972     29.69308     -1.395681

                 (0.06408)    (0.13949)    (24.3723)    (0.99319)        -.008
                 [-7.81275]   [ 2.63797]   [ 1.21832]   [-1.40526]
                                                                         -.012


LNUSGDP(-1)      -0.027740    1.033963     18.35919     0.538966         -.016
                                                                                 2    4   6   8   10   12   14   16   18   20
                 (0.03343)    (0.07276)    (12.7129)    (0.51806)

                 [-0.82987]   [ 14.2106]   [ 1.44414]   [ 1.04036]

                                                                                      Response of LNUSGDP to FFR
LNUSGDP(-2)      0.044238     -0.050074    -16.47289    -0.536243        .002

                 (0.03311)    (0.07208)    (12.5943)    (0.51323)
                                                                         .000
                 [ 1.33590]   [-0.69468]   [-1.30796]   [-1.04484]
                                                                         -.002

FFR(-1)          0.001277     0.000546     0.685222     -0.004429        -.004
                 (0.00020)    (0.00044)    (0.07700)    (0.00314)
                                                                         -.006
                 [ 6.30684]   [ 1.23805]   [ 8.89911]   [-1.41145]

                                                                         -.008

FFR(-2)          -0.000973    -0.001498    0.199358     0.000892
                                                                         -.010
                 (0.00021)    (0.00046)    (0.08025)    (0.00327)                2    4   6   8   10   12   14   16   18   20

                 [-4.61008]   [-3.26140]   [ 2.48436]   [ 0.27264]


                                                                                     Response of LNCOMPRICE to FFR
LNCOMPRICE(-1)   0.011456     0.016885     6.377814     1.322609
                                                                          .02
                 (0.00489)    (0.01065)    (1.86141)    (0.07585)

                 [ 2.34069]   [ 1.58496]   [ 3.42633]   [ 17.4363]
                                                                          .00


LNCOMPRICE(-2)   -0.003180    -0.007970    -4.119064    -0.334379
                                                                          -.02
                 (0.00512)    (0.01114)    (1.94623)    (0.07931)

                 [-0.62133]   [-0.71549]   [-2.11643]   [-4.21608]        -.04


C                -0.090975    0.121318     -10.03786    0.013596          -.06

                 (0.02288)    (0.04979)    (8.70009)    (0.35453)
                                                                                 2    4   6   8   10   12   14   16   18   20
                 [-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
   Question 1 VAR Output


VAR Model - Substituted Coefficients:
===============================
LNUSCPI = 1.348871695*LNUSCPI(-1) - 0.3914013529*LNUSCPI(-2) - 0.01230689248*LNUSGDP(-1) + 0.03849480559*LNUSGDP(-2) + 0.001442262678*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*UKTERMSOFTRADE(-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) + 0.0006943965013*FFR(-1) - 0.001629258657*FFR(-2) +
0.00920700888*LNCOMPRICE(-1) - 0.006072719048*LNCOMPRICE(-2) + 0.03635421322*S(-1) - 0.02063380306*S(-2) + 0.07040940128*UKTERMSOFTRADE(-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*FFR(-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) - 0.005337222801*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) + 0.001229985298*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*UKTERMSOFTRADE(-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*UKTERMSOFTRADE(-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) - 0.0009444956945*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*UKTERMSOFTRADE(-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) - 0.0004038710547*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*UKTERMSOFTRADE(-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) + 0.1194613758*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) + 1.045223239*UKTBILL(-1) - 0.2539929088*UKTBILL(-2) + 16.00963562
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.


                                                      Response of S to Cholesky
                                                      One S.D. FFR Innovation
                                      .0035

                                      .0030

                                      .0025

                                      .0020

                                      .0015

                                      .0010

                                      .0005

                                      .0000

                                     -.0005
                                              2   4   6    8   10    12   14      16   18   20
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


                                                                     Response of UKNETTRADE to Cholesky
            Response of UKTERMSOFTRADE to Cholesky                         One S.D. FFR Innovation
                     One S.D. FFR Innovation
                                                           20
.001
                                                            0

.000                                                       -20

                                                           -40
-.001
                                                           -60

-.002                                                      -80

                                                          -100
-.003
                                                          -120

-.004                                                     -140
        2      4   6    8   10   12   14   16   18   20          2   4    6    8   10   12   14   16   18   20
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.
                                      Response of LUKGDP to Cholesky
                                         One S.D. FFR Innovation
                      .001



                      .000



                      -.001



                      -.002



                      -.003
                              2   4      6    8   10   12   14   16    18   20
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.

								
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