Ch 6 - Stylised facts

Question 1

Most macroeconomic time series can be decomposed into its ______ and ___________ components

Answer 1

Long term (trend) , short term (business cycle)

Question 2

The trend component is mainly driven by factors that are not easily controllable by the monetary or fiscal authorities, such as _________ and _______

Answer 2

Demographic changes, technological progress

Question 3

Business cycles are fluctuations of ______ around its trend components

Answer 3

Real GDP

Question 4

What is a negative output gap?

Answer 4

Business cycle is below the trend

Question 5

What is a positive output gap?

Answer 5

Business cycle is above the trend

Question 6

Give 3 reasons by we should transform data by taking natural logarithms

Answer 6

1. rescales the time series from large numbers to more reasonable numbers without affecting the time series properties significantly
2. the difference between the natural logarithms of two numbers is approximately the percentage change in the time series across time periods
3. graphically you can interpret the changes in the timer series, since the slope of the log of a series is approximately the growth rate

Question 7

Name 2 methods of separating trends from cycles

Answer 7

1. Remove a constant growth rate (linear trend)

2. Hodrick-Prescott filter (HP)

Question 8

What does the volatility of a variable indicate?

Answer 8

How the variable fluctuates in time

Question 9

What does cyclicality show?

Answer 9

How the business cycle component of a particular variable evolves in relation to the business cycle component of the real GDP

Question 10

How do you measure volatility?

Answer 10

Variance/ standard deviation

Question 11

How do you measure cyclicality?

Answer 11

Covariance, correlation

Question 12

What is persistence?

Answer 12

Likelihood of a variable to stay, say, above trend next period, when it is above trend in the current period

Question 13

How do you measure persistence?

Answer 13

Autocorrelation

Question 14

What does the Phillips curve show?

Answer 14

An inverse relationship between the rate of unemployment and the rate of inflation in the short run

Question 15

Give 4 reasons for a flattening Phillips curve

Answer 15

1. Data problems
2. The true MC of hiring labour is not accurately captured due to open economy dynamics
3. Structural changes in price setting behavior, increased globalisation has reduced stickiness in product and labour markets
4. the standard New Keynesian model may not be fully capturing the dynamics of the Phillips curve