EC306 - Econometrics II Time Series Vacation Assignment

Assignment Task

Data

The data file contains U.K. observations on the variables below. The first observation is Jan 1955 in both

Quarterly

• Nominal GDP sa
• Unit Labour Cost Index sa
•  Unemployment rate sa
• GDP Deflator sa

Monthly

• CPI All Items: Annual Rate
• Unemployment rate sa
• Average weekly earnings sa
• GDP Deflator sa
• The index of Production cvmsa

1. This is a question about forecasting GDP:

(a) Estimate a set of four arima models for Real GDP 1960q1-2000q4. Include at least one model which assumes GDP is a trend stationary process, and three plausible arima(p,d,q) models, including examples with the restrictions: i) q=0 and ii) p=0.

(b) Basing your discussion on the in-sample properties of your model, why did you select the models you chose in each class, and which of your four models appears to be the best?

(c) Using the estimates from part (a), evaluate the out-of-sample forecasting performance of each model on the sample 2000q1-2006q4, at horizons of one and four quarters. Comment on which is your best model at each horizon and how these results compare to those in (b) above.

(d) Re-estimate your preferred model from part (c) on the period 1960q1-2006q4. Forecast out of sample at horizons of one and four quarters for the period 2007q1 to 2013q4. Comment on the quality of the forecast compared to your expectations.

(e) How do you think the performance of your trend stationary model in part (a) would compare to the performance of your preferred model on the 2007-2013 sample? Give a brief explanation, or explain why the trend stationary model is your favourite. You do not have to produce forecast results. 

2. This question is forecasting in a multivariate context:

(a) Estimate a VAR using additional data of your choice on the 1960q1-2006q4 sample. Compare the 1 and 4-step ahead out of sample forecast performance of your VAR on the 2007-2013 sample with your preferred forecast from question 1. Provide some intuition for your results.

(b) Consider the task of updating quarterly GDP forecasts as new information becomes available within the quarter. Demonstrate a method capable of doing this and present results of the exercise graphically for next quarter's GDP using a model estimated to 2006q4, and forecasting.

3. Consider a model of price inflation, wage inflation and unemployment, on the longest sample for which all are available in the data set.

(a) Estimate a model to account for the interactions between these variables, accounting for the time-series properties of the data on this sample. Discuss briefly any economic interpretation/findings or intuition you find from your estimated model.

(b) Comment on the role of unemployment in your model, and any economic implications of this.

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