Economics 406 – Winter 2022 Data Project
The data project is worth 20% of your grade. It is due on April 14, 2022. There is a dropbox where you can submit your executive summary and all your codes and output.
1 Description of the project
This data project uses an SVAR to analyze the impact of monetary policy shock on the Canadian economy. You can use the built-in functions of Matlab to perform all your esti- mations, including generating the IRFs and the forecast. There is also a toolbox that you can download that is easy to use. It creates nice graphs. I used this toolbox from -Bianchi, which can be downloaded using this link Link: Cesa- . Use the latest version of the toolbox, which is version 3. You can follow the posted video to install the toolbox properly in Matlab.
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As the main deliverable, write two-pages executive summary describing your results. You are also required to perform a forecast for real GDP year over year growth.
1. What is the impact of a monetary policy shock on real GDP and inflation? 2. What are the forecasts for real GDP for the next 12 months (or 4 quarters)
1.1 Data for the project
Most of the data you will use for this project is from the first assignment. The Matlab sample codes, examples and the theory on SVAR will be very useful for this project. If you are not using Matlab, you will still need to submit all your output and codes.
2 Variables in the VAR
Your SVAR should contain the following variables which you have already downloaded for Assignment 1
(a) 3-month T-bill rate (average yields). This is your short-term nominal interest rate (b) Gross Domestic Product (GDP)
(c) Consumer Price Index (CPI)
• In addition, download the following data from Statistics Canada and from the Federal Reserve Bank of St. Louis (note that the Commodity Price Index series starts in 1972)
(d) Bank of Canada, Commodity Price Index (Total excluding energy), Statistics Canada, Table: 10-10-0132-01
(e) US/CAN Nominal exchange rate, Federal Reserve Bank of St. Louis (EXCAUS). This data is monthly but FRED can transform the data to quarterly. Click on “Edit Graph” and then select quarterly in “Modify frequency”
Data range and frequency
Use quarterly values for all the data. You have already transformed your values for the 3-month T-bill rate and the CPI from monthly to quarterly in Assignment 1.
All the other variables are quarterly already; there is no need to do any transformation
Since the Commodity Price Index starts in 1972Q1, start all your data series in 1972Q1
Your estimation for your VAR will start in 1973Q1 since you will have to transform some variables in year over year growth rate so that they are stationary
Data transformation
Take the year over year growth rate of all your variables except the nominal interest rate
You can take the log of each variable first and then calculate the year over year growth rate using the log values, or you can take the year over year growth rate using the raw values (except for the nominal rate)
Plot your raw data and your transformed data (year over year)
Once you reach this stage, you are ready to estimate your VAR, generate your IRF and forecast.
Number of lags in the VAR
As we discussed in class, we would use an AIC or BIC test to determine the optimal number of lags in the SVAR. Instead of asking you to perform those tests, I will ask you to use 4 lags in your VAR.
Assessment
You will be assessed on:
(a) How you transform your variables and why. [10 percent]
(b) What technique you are using to identify the monetary policy shock and why (justify as much as you can the ordering you are using) [10 percent]
(c) The overall execution of the SVAR (includes plotting the raw data, the transformed data, that is, the data you are using in your VAR, the impulse response function, the forecast for GDP growth. You will need to provide your output and codes) [50 percent]
(d) A maximum of a two-page report describing the question, your data, the methodology and results (I am looking for clarity, conciseness and good writing). Do not exceed two pages. The objective is to write an executive summary that you will have to do if you work as an economist [30 percent]
4 Deliverables
Your deliverables are as follows:
1. Your report explaining your research question, data, methodology, results and findings
• Under research question
– This part is easy. Describe what your overall objective is (identify monetary
policy shock and forecast real GDP y/y growth) • Under data
– Briefly describe the data you are using and the source of your data. • Under Methodology
– Explain what transformation you did with the variables and why
– Why you are choosing a particular order for the variables (assuming you are
using a short-run identification)
– Describe how you are doing the forecast for the real GDP growth
• Under Results and Findings
– Explain the IRF following the monetary policy shock. Are your results as
expected? If not, why (at least try to explain why)
– Briefly describe the results of your forecast (is the SVAR forecasting positive or negative growth, how much?)
2. All the codes and data that you used in the project.
• If you are using Matlab, produce an output.
• Your output should contain graphs of the original data, transformed data, IRF and forecast
• If not already included in your output, submit all your codes 3
Some useful references
Christiano, J.J., M. Eichenbaum, and C.L. Evans. 1998. “Monetary Policy Shocks:
What Have We Learned and to What End?” NBER Working Paper No 6400 Link: CEE Paper
Christiano, J.J., M. Eichenbaum, and C.L. Evans. 2005. “Nominal rigidities and the dynamic effects of a shock to monetary policy,? Journal of Political Economy, 113 (1), 1?45.
Caldara, D., and C. Kamps. 2008. What Are The Effects of Fiscal Shocks? A VAR-Based Comparative Analysis,” European Central Bank Working Paper No 877 Link: ECD Fiscal Policy paper
• L. Gambetti. “Structural Vector Autoregressions” 2019. Manuscript. Link: Gambetti paper
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