Post on 19-Dec-2015
Project II
Troy DewittEmelia Bragadottir
Christopher WildermanQun Luo
Dane Louvier
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
0
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2519
54
1957
1959
1962
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2007
%
UNEMPLOYMENT FFR
Trace Unemployment Rate and Federal Funds Rate - It appears that changes in the unemployment rate lag changes in the federal funds rate
Correlogram for FFR Correlogram for Unemployment
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
Differenced Time Series
Correlogram of differenced FFRCorrelogram of differenced
unemployment rate
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
Univariate ARMA Output
Correlogram of ResidualsdFederal Funds Rate dUnemployment Rate
Correlogram of Residauls SquareddFederal Funds Rate dUnemployment Rate
ARCH LM TestdFederal Funds Rate dUnemployment Rate
ARCH GARCH ModeldFederal Funds Rate dUnemployment Rate
Actual Fitted Residual GraphsdFederal Funds Rate dUnemployment Rate
Correlogram of ResidualsdFederal Funds Rate dUnemployment Rate
Correlogram of Residuals Squared
dFederal Funds Rate dUnemployment Rate
Forecasts of Univariate Models
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?
Cross Correlogram: Differenced Unemployment Rate and Differenced Federal Funds Rate (Evidence of Two-Way Causality)
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
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
Impulse Response VAR Estimates (Unemployment appears to have significant effects on the Federal Funds rate for five months)
Impulse Response VAR Estimates (Federal Funds rate has an insignificant effect on the unemployment rate)
Test of the models ability to accurately forecast Apr 06 – Apr 07
Test of the models ability to accurately forecast Apr 06 – April 07
VAR Forecast May 07 – Dec 07
VAR forecast of May 07 – Dec 07
Forecast Comparison
Questions?