Economics 607
Monetary Theory and Policy
Winter 2011
Homework 2
Due Tuesday, January 18 likely the 20th
1. Using data on the growth rates of real GDP and M2 (calculate as the difference in logs), estimate a VAR model. To select the lag length, use the AIC criterion to determine the lag length for the money growth and output growth equations individually, then use the maximum of the two estimates as the lag length in the VAR model.
2. Find the lag length using the system approach to the AIC described on pages 210-211 of the User's Guide for version 8.
3. Collect data on real GDP, M2, the Federal Funds Rate, and the Perrsonal Consumption Index less Food and Energy and convert it into a RATS data set.
4. Use the data from problem 3 to estimate a four variable two lag VAR model for the growth rate of real GDP, the growth rate of M2, the Federal Funds Rate, and the growth rate of Personal Consumption Index less Food and Energy. Then graph the IRFs for (a) the response of real output to a money shock, and (b) the response of real output to a shock to the FF rate. (c) What ordering did you use and why did you choose it?
5. Repeat the previous problem, except calculate the VDCs for (a) the response of real output to a money shock, (b) the response of real output to a shock to the FF rate, (c) the response of money to a shock to real output, and (d) the response of the FF rate to a shock to real output.
6. Carry the numerical example used in class to calculate IRFs and VDCs out one more step (calculate the values after one more step for both the IRFs and the VDCs).
7. Are the IRFs and VDCs in problem 4 and 5 robust to changes in the ordering?