Consumer Price Index (CPI) - Introductory Econometrics - Fama’s (1975) Classic Study on Interest Rates - Economics Assessment Answer

Internal Code: 1AHCHD

Economics Assessment Answer

TASK: Question (Predicting future ináation using the ëterm structure of interest ratesí) ëFamaís (1975) classic study on interest rates as predictors of ináation suggests that movements in interest rates primarily reáect áuctuations in expected ináation (the so-called Fisher e§ect1) rather than changes in real interest rates. Subsequent work supports this conclusion in the postwar United States except for the period [...] from October 1979 until October 1982. This evidence along with the evidence that the term structure contains information about future (nominal) interest rate movements suggests that the term structure might also contain information about the future path of ináation.í Frederic S. Mishkin, Journal of Monetary Economics (1990). The objective is to evaluate empirically what the term structure of interest rates2 tells us about future ináation, given that ináation is a major concern of policymakers. For this project, the Örst thing to do is to read the Örst 10 pages of Mishkinís article (posted on Moodle), in particular, to understand the purpose of the ìináation-change equationî and what can be learned from it. You will use data from the Federal Reserve Bank of St. Louis found at the following website. For each group: A. You will conduct your time series analysis using monthly data on U.S. consumer prices and nominal interest rates over the period Jan-1984 to Feb-2019. Download the U.S. Consumer Price Index for All Urban Consumers (All Items, Index 1982 1984 = 100, Monthly, Not Seasonally Adjusted).

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