(Solution) If You Invest Into Two S&p Stocks, Should Those Two Investments Be Correlated Or Uncorrelated And Why? | Snapessays.com

(Solution) If you invest into two s&p stocks, should those two investments be correlated or uncorrelated and why?

I want to know the hw2 problem answer or the way to solve this problem by matlab.ECO 3091

Homework 2.

Due April 6

1. [10 pts] Explain whether the “Lucas critique” applies to the classical Phillips curve. How about

the expectations-augmented one?

2. [30 pts] Recall the classical Phillips curve from class:

?

t

=

?

+

?

1

u

t

+

v

t

(1)

where

?

t

and

u

t

are the in?ation and unemployment rates at time

t

, respectively. One way to handle

the issue of “structural instability” is to introduce the expectations-augmented Phillips curve:

?

?

t

=

?

+

?

1

u

t

+

±

t

(2)

where ?

?

t

=

?

t

-

?

t

-

1

.

(a) [10 pts] Estimate the U.S. natural unemployment (NAIRU) based on (2). Provide the meaning

of NAIRU estimate.

(b) [10 pts] Using the data from class, ?t the model in (2) and plot the regression ?t along with

the data, to decide whether or not the Lucas critique applies to (2). In plotting the regression ?t,

the x-label should be “cyclical unemployment”, while that for the y-label should read “unexpected

in?ation”.

(c) [10 pts] Plot the NAIRU estimate and the U.S. monthly unemployment rate “together”. Here

the x-label should show the corresponding month and year, while the y-label should be in percent

(%). Explain how this plot can be used to determine the state of economy in business cycles.

3. [30 pts] Consider the following four models:

Autoregressive model :

?

t

+1

=

?

+

?

1

?

t

+

?

2

?

t

-

1

+

±

t

+1

Classical Phillips curve :

?

t

+1

=

?

+

?

1

u

t

+

?

2

u

t

-

1

+

±

t

+1

Gorden’s triangle model :

?

t

+1

=

?

+

?

1

?

t

+

?

2

u

t

+

?

3

u

t

-

1

+

?

4

z

t

+

?

5

z

t

-

1

+

±

t

+1

Expectations-augmented Phillips curve :

?

?

t

+1

=

?

+

?

1

u

t

+

?

2

u

t

-

1

+

±

t

+1

where

z

t

represents a measure of supply shock to the economy at time

t

. Here

±

t

is the model error.

Using 300 as the length of forecasting period, determine which model forecast the U.S. in?ation

series “the best”. One can use the root-mean-squared-error (RMSE) as the measure of forecasting

accuracy here.

4. [30 pts] Using the “rolling window” method, repeat Q#3.

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