ECO320 Advanced Macroeconomics

Coursework (Group Project). Total Score: 100 Points, which has a 30% weighting on the final mark of this module.

Release Date: 25 Marah 2024, 5:00 p.m., on Learning Mall (Monday)

Submission Due Date: 19 May 2024, 5:00 p.m., on Learning Mall (Sunday)

This assignment (group project) assesses the learning outcomes of “D & E” defined in the module specification and counts towards 30% of final mark. This assignment focuses on the application and testing of the New Keynesian Phillips Curve (NKPC). The students would test the NKPC for two economies (closed-economy and open-economy).  Each group comprising of 5 students (or 4-depending on the actual number of students in Week 3) would select 2 countries, including 1 closed-economy and 1 open-economy. If the group is uneven like 2/3 students left, they would then choose only one advanced economy. The selection of countries should be completed by the end of Week 7 and shared with the module leader for confirmation. Each group should have at least  1  different country for the macroeconomic analysis.

The students would analyse inflation and business-cycles statistics at the quarterly frequency starting from 1980. Download major macroeconomic indicators namely output (real GDP), inflation (CPI based), marginal cost, and any relevant measure to proxy “openness” . The data can be downloaded from WDI, IMF, and other potential sources, as discussed during the lectures. The minimum number of observations should be 30 for the macroeconomic analysis. Convert all the data in the natural logarithm and construct relevant series. For example, inflation would be based on log ofCPI.

Attach your tables in Appendix in the submission file, showing the series after transformation, with clear explanation using a section called Data sources and construction.

Plot and explain the macroeconomic variables of the NKPC. This would include inflation, output gap, real marginal cost, and openness, depending on your NKPC specifications. Copy these graphs into your word file, using footnotes under these graphs for clear presentation of information from the macroeconomic data. You are required to perform the following tasks, providing clear explanation for each task.

a.   Write down the empirical specifications of the NKPC both for the closed-economy and the open-economy. Differentiate the key structural parameters related to two different models of the closed-economy NKPC and open-economy NKPC. (10 marks)

b.   How does the NKPC differ from the family of other Phillips curves with important policy implications? (10 marks)

c.   How do the macroeconomists proxy the real marginal cost to estimate the NKPC? (10 marks)

d.   You would now employ two alternative measures of the cyclical components, namely, log-quadratic detrending (LQD) and Hodrick-Prescott (HP) filter with the smoothing parameter λ = 1600. Make the graphs of the cyclical component of the output gap based on both real GDP and real marginal cost. Analyse the periods of recessions and expansions, and thus inflationary pressures in these phases. (10 marks)

e.   Calculate the volatility (standard deviation) σ of output gap, inflation, and the measure of openness for your chosen countries.  Which country (closed-economy or open- economy) have more volatile output? Provide reasons for differences in the volatilities of two economies, using two measures LQD and HP filter. (10 marks)

f.   Calculate the Covariance of the cyclical component of real GDP with the real marginal cost, openness, and inflation. Why do macroeconomists calculate “empirical” covariance between cyclical component of real GDP and other macroeconomic variables? (10 marks)

g.   Which statistical method would be useful to estimate the NKPC? Justify your estimation approach and relevant assumptions of methodology. (15 marks)

h.   Estimate the closed-economy and open-economy NKPC for your chosen countries. Discuss and interpret the estimates and their statistical significance, linking with the existing empirical studies of the NKPC. (25 marks)

Coursework Requirements

•    Symbols and equations are encouraged to present your information from the macroeconomic data.

•   Please attach the cover sheet and submit your PDF file before   the aforementioned deadline. Late submissions will incur penalties according to the XJTLU Code of Practice on Assessment.  There is a 5% point mark deduction for any lateness at all (even 1 min); an additional 5% point deduction for each day of the late submission. Weekend days count in this penalty too. The maximum penalty is 25% points.

•   Please put your name and ID down at the end of each section for identification that this is the section you take care of.