International Financial Statistics, Datastream, OCED Database Economics Assignment Help

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The objective of this coursework is to study the Taylor rule. In its simplest form, this theory suggests that central banks set the (short term) interest rate rt by looking at the GDP growth (Aye = ye - ye_i, where yt is the GDP level) and inflation rate (ire = ye with p being the level of prices). A regression-type representation is where Al is the desired level of inflation (typically 711* = 2%) and er is a monetary shock.' Another implication is that central bank governors increase the interest rates when there is economic growth (p' > 0) and/or when inflation is higher than the desired level (p2 > 0), ceteris paribus.2 The file allocation.pdf contains the (random) allocation of the three variables (rt, yt, Pt) for different countries, for each student. You are then asked to retrieve the corresponding series - the suggested source is the FRED database at the St Luis Fed, though other sources are possible (International Financial Statistics, Datastream, OCED database, etc.). Spend a bit of time getting familiarised with the database and download all the available periods from the start date corresponding to your allocation, but leave at least 12 periods out of the estimation stage so that you can compare the forecasting performance of competing models - e.g. if the end date of your sample is July 2020, estimate your models with data up to July 2019, so that you have 12 periods to construct forecast 

Estimate appropriate ARMA models for rt and ?t carefully explaining how your models were selected.
1. Obtain 12-step ahead forecasts for each of the series in point 1, assessing the respective forecasting ability.
2. Test whether or not rt yt and pt are stationary. According to your answer, does regression-type representation in equation 1 make sense?
3. Estimate the equation 1 describing the Taylor rule . Are the predictions of the theory confirmed?
4. It has been claimed that the Great Recession (2008) broke the relationship implied by the Taylor rule because central banks increasingly used “Quantitative Easing” instead of interest rate as monetary policy tool. Test that statement formally.
5. The quantity theory of money argues that in the long run the general level of prices is proportional to the money supply (mt) in an economy. Download mt for your country (you can use any available measure of money aggregates, eg M2) and  formally test this long-run relationship.

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