1
Intro Macro
N. Sheflin
SOLVED
A Taste of Macro Econometrics
Estimating a Consumption Function and Making a Forecast
The point of this exercise is to introduce you to what (many/most) economists actually do – they use
statistics, math, and computers to estimate, test and predict economic relationships developed from economic theory. i.e.,
they do ECONOMETRICS
Congratulations
.
You are doing so well in Macro, that the President wants you to provide some
econometric
analysis in
which you will use
mathematical, statistical and computer tools to estimate, test and predict economic relationships
(that’s the
definition of ECONOMETRICS
). If done well, you might become an economic advisor to the President.
Specifically, he is concerned with how aggregate consumption will do for the rest of the year. You will specify, estimate, and
test a Keynesian consumption function, and use it to make a forecast of consumption for this year, and estimate the multiplier
with the help of Shazam (
http://shazam.econ.ubc.ca/runshazam/
) – look up Captain Marvel
There will be some questions from this assignment on a future homework assignment, and the final, not to mention when
you visit the White House. So make sure you can answer the questions in CAPITALS below.
A.
Specifying a Consumption Function?
WHY WOULD THE PRESIDENT BE CONCERNED WITH FORECASTING CONSUMPTION?
•
to FORECAST GDP – since consumption is the largest component of GDP, approximately 2/3 of it
•
To ESTIMATE the mpc and multiplier and this the size of the effect of a change in government spending
(or tax)
•
TEST C function theory (mpc>0) is there really a relationship between consumption and income?
WHAT DOES KEYNESIAN THEORY SAY ABOUT THE DETERMINANTS OF CONSUMPTION?
•
C=f(YT,W, other) dC/d(YT),W dC/dW >0
that is, there is a positive relationship between consumption
and disposable income (YT), and consumption and wealth
SPECIFY (WRITE DOWN) A LINEAR EQUATION FOR A CONSUMPTION FUNCTION.
o
C=a+b(YT)+cW
WHAT DOES THEORY SUGGEST ABOUT THE PARAMETERS (SIGNS?, SIZES?)
•
0<b<1
0<c
B.
Entering and Printing Data in Shazam
•
Go to
http://shazam.econ.ubc.ca/runshazam/
•
Copy and paste the following shazam commands and data into the Enter SHAZAM command ‘box’ and
click on the “Click here to send information button”
•
Scroll down the screen to see the results
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•
What you’ve done is told Shazam to expect 21 observations (years) on 5 variables. Note Shazam
instructions end with STOP command
•
* lines are just comments
** Consumption function in shazam
*
note shazam commads are in CAPITALS comments begin with *
*
always leave the following in
*
*
tell Shazam how many observations (19902010)
SAMPLE 1 21
*
*
tell it how many variables and assign names and read in data
*
note:
PCE96 is real personal consumption expenditures
*
DPI96 is real personal disposable income
*
SP500 is the S&P 500 index (proxy for wealth)
*
PCEPI is the consumer price index
READ
YEAR PCE96 DPI96 SP500 PCEPI
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 Fall '09
 sheflin
 Econometrics, Linear Regression, Regression Analysis, Consumption function, Shazam

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