Question

1. Hands dirty with data. In this problem, you will retrieve and manipulate macroeconomic data and verify some relationships that inform macroeconomic theory.

(a) Go the Federal Reserve Bank of St. Louis’ Federal Reserve Economic Data(FRED) website at https://fred.stlouisfed.org and download the following three data series in to an Excel file. You can then do the subsequent analysis using Excel, Stata, or other software of your choice:

Real Gross Domestic Product (GDPC1), percent change from year ago, deviation from trend. Make sure you set the units of account to “percent change from year ago” on the “Edit Graph” menu. Otherwise, you will simply have to manually calculate the percent change from a year ago from the quarterly levels. You transform this series to deviation of GDP growth from trend in the following way. If you look at the GDP percentage change series, you’ll notice that the average percentage change (growth rate) is above zero. So calculate the average growth rate for the whole series. Then the deviation from trend equals the growth rate minus the average growth rate. This measure shows how the economy is growing relative to its average or “natural” rate.

Total Non-farm Payroll Employment (PAYEMS), year over year percentage change. Make sure you set the units of account to “percent change from year ago”. Follow the same procedure from above in creating the series for deviation from trend in employment growth. Because the GDP series is quarterly and the employment series is monthly, you’ll need to transform the employment series to quarterly. Just set each quarter’s employment equal to the average of the three months employment growth rate. This is an option when you are selecting the data to download from FRED.

Consumer Price Index for All Urban Consumers (CPIAUCSL), all items less food and energy, year over year percentage change. Make sure you set the units of account to “percent change from year ago”. Follow the same procedure from above in creating the series for deviation from trend in employment growth. Also, follow the same procedure as with the PAYEMS series to transform CPIAUCSL from a monthly series to a quarterly series.

M1 Money Stock (M1SL), percent change from year ago. Make sure you set the units of account to “percent change from year ago” on the download page.

(b) Create a chart that plots both Real GDP (% chg. from year ago, deviation from trend) and total non-farm payroll employment ($ chg. from year ago) from 1948Q1 to 2015Q1.

1. Calculate the correlation of the two series over the period 1948Q1 to 2015 Q1.

2. How do you explain the two series being related in this way?

(c) Create a chart that plots both the CPI (% chg. from year ago) and M1 Money Stock (% chg. from year ago) from 1960Q1 to 2015Q1.

1. Calculate the correlation of the two series over the period 1970Q1 to 2015Q1.

(d) Now create a 10-year average CPI annual growth rate by putting a formula in each cell starting in 1960Q1 that averages the past 40 quarters of annual growth rates. Create the same 10-year average annual growth rate series for M1 Money Stock but starting in 1970Q1. Create a chart that plots both the 10-year average annual CPI growth rate and the 10-year average annual M1 Money Stock growth rate from 1970Q1 to 2015Q1.

1. Calculate the correlation of the two series over the period 197to 2015Q1.

2. How do you explain the difference in the correlations between part (c) and part (d)? (Hint: Has to do with short-term and long-term.)

Answer 1

b.

1. The correlation value is 0.81.

2. The correlation has a quite high positive value for the change in real GDP and non-farm employment. It means that when the Real GDP in the country increases or decreases, the non-farm employment rate also increases or decreases simultaneously.

c.

1. The correlation between CPI and Money stock is -0.085.

d.

1. The correlation value is 0.577.

2. The correlation in c implies no correlation by its value. We can say that in short-term which is basically change over the past year as calculated, there is no correlation between CPI growth rate and M1 money stock growth rate. they both move independently. While when we include the change in both the variables over past 10 years, the correlation got increased from the previous part. this merely implies that there is a long-term relationship between CPI growth rate and M1 Money stock growth rate.

Following are all the graphs been plotted.