BUS5ATE: Economic and financial time series- Economics Assignment

Internal code- MAS3792

Economics Assignment

The real interest rate is an interest rate adjusted for either realized or expected inflation—is the relative price of consuming now rather than later.1 As such, it is a key variable in important theoretical models in finance and macroeconomics. Question- Part 1: Implications of Unit Root Read Choi . Provide a summary of the implications of the presence of unit root in economic and financial time series. Part 2: Unit Root in Real Interest Rate Read Neely and Rapach (2008) and provide a non-technical summary of the paper (objective,main points and arguments, main findings and their implications), it should cover- a) 3-Month Treasury Constant Maturity Rate b) PCE deflator inflation rate, Personal Consumption Expenditures: Chain-type Price Index (2000=100) c) Ex post real interest rate: Three-month Treasury bill rate minus the realized inflation rate in the subsequent quarter d) Consumption growth rate Part 3: Basic Data Analysis Conduct the basic data analysis of the above time series in the data set, presenting their time plots and SACF. Discuss their time series properties including the basic components, the degree of persistence, and the degree of dependence. Part 4: Replication Replicate the unit root testing and co-integration testing results reported Tables 2 and 3 of Neely and Rapach (2008). Do not need to replicate MZ test and Johansen test (trace) results: ADF test results and Engel- Granger co-integration results only. Provide a summary of the results and discuss their implications.

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