Macroeconomics 137
Problem set 2
Question 1
1. Go to FRED. Download the data for Effective Federal Funds rate (FEDFUNDS), Industrial Production (INDPRO), Consumer Price Index (CPIAUCSL), Unemployment rate (UNRATE), and yield curve (T10Y2Y). Download all of these as monthly series. Use data from January 1994 to December 2007.
2. Plot these series on separate graphs. Correctly label the x-axis and y-axis for each graph.
3. Using local projections, estimate impulse responses for log (Industrial Production), log (CPI), unem- ployment rate, and yield curve to a 100 basis point change in federal funds rate.
You will run thee following regression to recover βh for each horizon h:
yt+h - yt- 1 = α + βh ∆it + γhyt- 1 + ϵt+h
where y is the variable whose impulse response you are estimating, h is the horizon at which you are estimating the response, ∆it is the month on month change in Federal Funds rate, and yt- 1 is the lag of the dependent variable. Plot the βh coefficients for horizons 0 to horizon 24 against horizons on x-axes for the four dependent variables.
4. Explain the estimated responses. Do these align with what you’d expect based on the Evidence on effects of monetary policy that we discussed in the class?
5. Explain a problem with this estimation strategy. (i.e. why these estimates are not causal).