Due Tuesday 3/1
1. Find the first two principle components of the consumption, investment, GDP, labor hours, employment (all in growth rates), and the unemployment rate.
2. Use these to estimate a FAVAR comprised of GDP growth, inflation (use this), the federal funds rate, and the two factors derived from step 1.
3. Show how inflation and labor hours respond to a shock to the federal funds rate. Is there a price puzzle in this model?
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