PS7Solutions - Economics 1011b Problem Set 7 Professor Aleh...

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Economics 1011b Problem Set 7 Professor Aleh Tsyvinski The problem set is due next Tuesday, April 24, by 5 pm in your TF’s mailbox in Lit- tauer. Late problem sets will not be accepted. You can work in groups (discuss the so- lutions, etc). However, you must write the solutions by yourself. Please write down all derivations/explanations. For clarifications (not answers) please contact Leon Berkelmans ([email protected]). Exercise 1. Money Demand and Supply Go to the website of the BLS and download monthly data on the CPI level , seasonally adjusted all urban consumers (http://www.bls.gov/cpi/ and click on the relevant green di- nosaur on the right panel). Get the data from 1960 to the most recent available. Get data from the same period on seasonally adjusted M1 from the website of the Federal Reserve Board (http://www.federalreserve.gov/releases/h6/hist/). a. Take logs and detrend the data by finding the deviation from a fitted regression on a constant and a time trend (as was done in an earlier problem set). Graph the resulting series on the same graph. Solution: -0.2 -0.1 0 0.1 0.2 0.3 Jan-60 Jan-70 Jan-80 Jan-90 Jan-00 Price Money b. What is the comovement of prices and money (qualitatively, don’t worry about giving the correlation)? Does this suggest that shocks to money supply or money demand have been greater?
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