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Assignment 2-2

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Ushanthini Nithanthan
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17 views

Assignment 2-2

Uploaded by

Ushanthini Nithanthan
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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NIAGARA UNIVERSITY

HOLZSCHUH COLLEGE OF BUSINESS ADMINISTRATION, MBA Program.


EC0 640 – ECONOMETRICS
Assignment 2
This assignment contains a section for each of the six steps in applied regression analysis. Your project is
to estimate an aggregate consumption function for the U.S. economy for the period 1945-2014.
Step 1: Review the Literature and Develop the Theoretical Model
John Maynard Keynes, one of the most influential economists since Adam Smith, developed the notion of
a consumption function, which explains total consumption as a function of disposable personal income.
You probably learned about the Keynesian consumption function in your principles of macroeconomics
class. Other variables, including interest rates, affect aggregate consumption, too.
a) One key analytical concept in the consumption function is the marginal propensity to consume. If
you already know the definition of the marginal propensity to consume, write down the
definition. If you don’t know the definition, read through your macroeconomic textbook, or find
an appropriate website and write down the definition, being sure to specify your source with a full
bibliographical reference.
b) Use the Google scholar database or another source to find two articles from academic journals
(not newspapers, blogs, or magazines) about the consumption function. You don’t need to read
the articles, but you must give the full bibliographic references for both articles in your report.

Step 2: Specify the Model: Select the Independent Variables and the Functional
At this point, you would normally choose your independent variables and your functional form. Since I’d
like everyone to estimate the same equation, I’ll make those decisions for you. Please estimate a linear
consumption function that includes disposable personal income and interest rates as your independent
variables. The specific variables will be:
Variable Description
yeart year t
CONt real personal consumption expenditures in year t, in billions of 2009 dollars
PYDt real disposable personal income in year t, in billions of 2009 dollars
AAAt the real interest rate on Aaa corporate bonds in year t

Write out your equation for consumption as a function of disposable personal income and the interest rate,
using the form of Equation 3.1 (from the textbook) but substituting the appropriate variable names for Y
and X.

Step 3: Hypothesize the Expected Signs of the Coefficients


Hypothesize the expected signs of the slope coefficients of your model. Explain your reasoning—if you
don’t know, read about it. That’s what literature reviews are for!
Step 4: Collect the Data. Inspect and Clean the Data
A handy source of macroeconomic data is the Federal Reserve Economic Data (FRED) website:
h ps://research.stlouisfed.org/fred2//. It contains hundreds of thousands downloadable time series from
the U.S. and around the world. This assignment uses data from FRED. However, to safe you some time I
have compiled the data and uploaded the dataset in excel to Canvas. The dataset name is Assignment2.
Finally, clean and inspect the data. To do this, print out the summary statistics (mean, standard deviation,
minimum, maximum) for all three variables and look for unusual numbers. Do you see any maximum or
minimum values that are impossible (like negative consumption) or unreasonably high (like interest rates
over 100%)? If so, that’s a clear mistake in the data. If not, the dataset is good, and you may proceed.
Steps 5: Estimate and Evaluate the Equation
Estimate your equation using R and print out the results. Then evaluate your results by answering the
following questions:
a) Do the signs of the coefficients meet the expectations you developed in Step 3? If not, explain
what differences there are.
b) According to your results, what is the value of the marginal propensity to consume (rounded to
three decimal places)? By how much will consumption change if disposable personal income falls
by $1 billion (holding constant the corporate bond Aaa rate)?
c) According to your results, by how much will consumption change if the corporate bond Aaa
interest rate rises by three percentage points (holding constant disposable personal income)?
d) Based on your answers to parts a-c above, does your regression result seem reasonable, or do you
think that you’ve made an error of some sort?
Step 6: Document the Results
Write an equation similar to Equation 3.4 from the textbook to document your results.

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