ECON3350: Applied Econometrics for Macroeconomics and Finance Research Report 1
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ECON3350: Applied Econometrics for Macroeconomics and Finance
Research Report 1
Due date: 28 April 2023, 3:59pm
Instruction
The project consists of two research questions. Please answer both questions as clearly and completely as possible. Each question is worth 50 marks, for a total of 100 marks. This report will constitute 35% of your overall grade in this course.
We suggest that you use R for all empirical work involved. However, you should be able to use another statistical software (e.g. Eviews, Stata, Python, etc.) without a problem. If you do choose to work with an alternative software, please note that support for software-specific issues from the course coordinator and tutors may be very limited.
Please upload your report via the “Turnitin” submission link (in the “Assessment / Research Report 1”folder). Please note that hard copies will not be accepted. At the moment, the due date is 3:59 PM on 28 April 2023, but please check BlackBoard regularly for announcements regarding any changes to this. Your report should be a write-up of your answers (in PDF format, single-spaced, and in 12 font size).1
You are allowed to work on this assignment with others, i.e., you can discuss how to answer the questions with your classmate(s). However, this is not a group assignment, which means that the report must be written individually: you must answer all the questions in your own words and submit your report separately. The marking system will check for similarities, and UQ’s student integrity and misconduct policies on plagiarism strictly apply.
Questions
The dataset for this project is contained in report1 .csv. The variables are quaterly time- series of macroeconomic indicators in Australia for the period 1990Q3—2021Q4. In partic- ular, the dataset contains the following variables:
❼ real gdp: natural logarithm of seasonally adjusted gross domestic product measured in
❼ unemployment rate: the seasonally adjusted unemployment rate for all persons at the
end of each quarter;
❼ cpi inflation: the percentage change from the corresponding quarter of the previous
year of all groups CPI;
❼ cash rate: the RBA cash target rate at the end of each quarter.
1. Use the data provided to forecast inflation for 2022 and 2023 (two years or equiva- lently eight quarters past the end of the sample). In doing so, please describe how such forecasts may be useful for policy, and consequently, ensure your predictions and interpretation are aligned with the underlying motivation. Make sure to describe all potential sources of uncertainty. The break down of marks for this question is as follows (total 50 marks):
❼ motivation and practical purpose (10 marks);
❼ forecast model identification (10 marks);
❼ forecasts computation (10 marks);
❼ prediction and interpretation (10 marks);
❼ writing and organisation (10 marks).
2. Use the data provided to compute the dynamic effects of unemployment rate shocks and cash target rate shocks on inflation. In particular, investigate the following questions:
(a) Are there any identifiable equilibrium relationships between cpi inflation and un-
employment rate?
(b) If unemployment rate increases by 1% and remains at the new level thereafter,
what is the expected effect (all else constant) on cpi inflation (i) at the time of impact, (ii) one year after impact, (iii) 10 years after impact?
(c) If cash rate increases by 1% and remains at the new level thereafter, what is the expected effect (all else constant) on cpi inflation (i) at the time of impact, (ii) one year after impact, (iii) 10 years after impact?
Again, in answering these questions, please consider how the answers may be useful for policy, and consequently, ensure your interpretation is aligned with the underlying motivation. Also, please discuss the key assumptions underlying any conclusions you obtain from your analysis. The break down of marks for this question is as follows (total 50 marks):
❼ motivation and practical purpose (10 marks);
❼ model identification (10 marks);
❼ estimation and testing (10 marks);
❼ interpretation (10 marks);
❼ writing and organisation (10 marks).
2023-04-29