DescriptionThis course has an applied econometrics focus. The focus is on forecasting macroeconomic and financial variables. The requirements are three empirical papers. The first, worth 20 percent of the grade, is an extension of an existing article, where some of the results are duplicated and then extended. An example is provided if a student wants to use it. The second, worth 30 percent of the grade, is more of the same but with no example provided. The third, worth 50 percent of the grade, is a more original paper within the range of topics covered in the course, where data are collected and analyzed using whatever econometric techniques are relevant. This paper can possibly be the beginning of a senior essay. The aim of the course is to get students doing original empirical research using econometric tools. It is also to prepare students to read empirical papers in economics and finance.
Macroeconomic forecasting concerns forecasting variables like GDP, components of GDP like consumption, investment, and imports, inflation, the unemployment rate, interest rates, the government deficit, and exchange rates. There are various forecasting methods, some purely statistical time series techniques and some using economic theory. We will consider both. Financial forecasting is more problematic, since changes in asset prices may be roughly unpredictable. We will examine topics like momentum forecasting to see if some asset prices are predictable. There will also be some lectures on time series econometrics, which is usually not covered extensively in the core economertrics courses.
PrerequisitesTwo semesters of econometrics or statistics and intermediate macroeconomics. Special permission from the instructor is needed if the student has had only one semester of econometrics or statistics.
AttendanceClass attendance is required, and there will be considerable class participation.
Statistical SoftwareMany students use R, but any software is fine. A package focused on time series econometrics would be ideal, but not necessary. One possibility is the Fair-Parke program: FP Program. Class time will not be taken going over software.
ReadingsThe main reference for much of the macroeconomics part of the course is Macroeconometric Modeling: 2018, denoted MM below. Most of the other readings will be journal articles. The following are some of the readings. More readings will be added later.
January 18, 20, 23, 25: Econometric Methodology and Tools
- Begin the first paper. Get whatever software you are going to use in control. A topic will be given if you want to use it for the first paper. If you want to use the FP program, there will be a review session on it.
- Your econometrics text---use this for review throughout the course.
- Case, Fair, and Oster, Chapter 21, "Critical Thinking About Research."
- Fair, Ray C., Predicting Presidential Elections and Other Things, Second Edition, Chapters 1 and 2.
- MM, Sections 2.1 and 2.3.
January 30, February 1, 6, 8: Autoregressive (AR) and Vector Autoregressive (VAR) Forecasting; Quasi Ex Ante Forecasting
- Your econometrics text on time series modeling.
- Fair, Ray C., and Robert J. Shiller, "Comparing Information in Forecasts from Econometric Models," The American Economic Review, June 1990, 375-389.
- Fair, Ray C., and Robert J. Shiller, "The Informational Content of Ex Ante Forecasts," The Review of Economics and Statistics, May 1989, 325-331.
- Fair, Ray C., "Information Content of DSGE Forecasts," Journal of Forecasting, 2019.
First paper due Monday, February 13, before class
February 13, 15, 20, 22, 27, March 1: Structural Macro Modeling; Macro Financial Effects
- Begin the second paper.
- Lecture 9, Lecture 9
- Lecture 14, Lecture 14
- Lecture 18, Lecture 18
- MM, Sections 1.1, 1.2, Macroeconometric Modeling: 2018.
- US Model, US Model
- Wealth effects: MM, Sections 4.2, 5.7. (Optional)
- Case, Karl E., John M. Quigley, and Robert J. Shiller, "Wealth Effects Revisited: 1975-2012", NBER Working Paper No. 18667, 2013.
- Zhou, Xia, and Christopher D. Carroll, "Dynamics of Wealth and Consumption: New and Improved Measures for U.S. States", The B.E. Journal of Macroeconomics, 2012.
- Mian, Atif, Kamalesh Rao, and Amir Sufi, "Household Balance Sheets, Consumption, and the Economic Slump", The Quarterly Journal of Economics, 2013.
- Mian, Atif, and Amir Sufi, "What Explains the 2007-2009 Drop in Employment? Econometrica, 2014.
- Fair, Ray C., Analysis of Nine U.S. Recessions and Three Expansions.
March 6: Reports by Students on the Second Paper
March 8: Nowcasting
- Nowcasting, real time, Nowcasting real time
- Nowcasting paper, Nowcasting paper
- Koopmans, Tjalling C., Measurement Without Theory, The Review of Economics and Statistics, 1947.
- Fair, Ray C., Are Stock Returns and Output Growth Higher Under Democrats?.
Second paper due Friday, March 10, at midnight
March 27, 29: Shiller and the Stock Market, Discussion of SP500 Regression
- Begin the third paper. It can be an extension of the second paper, depending on how original the second paper was.
- Shiller, Robert J., Now the world faces two pandemics--one medical, one financial, April 1, 2020.
- Shiller, Robert J., Predictions for the Coronavirus Stock Market, April 2, 2020.
- Shiller, Robert J., Narrative Economics, American Economic Review, 2017.
- Shiller, Robert J., Bubbles, Human Judgment, and Expert Opinion, Financial Analysts Journal, 2002.
- S&P 500 data, S&P 500 data
- S&P 500 regression, S&P 500 regression
- S&P 500 output, S&P 500 output
- S&P 500 output1, S&P 500 output1
- S&P500 earnings, earnings
April 3, 5: Momentum Forecasting
- Moskowitz, Tobias J., Yao Hua Ooi, and Lasse Heje Pedersen, Time Series Momentum, Journal of Financial Economics, 2011.
- Hurst, Brian, Yao Hua Ooi, and Lasse Heje Pedersen, A Century of Evidence on Trend-Following Investing, The Journal of Portfolio Management, Fall 2017.
- AQR, You Can't Always Trend When You Want.
- Ahn, Hie Joo, and Chad Fulton, Index of Common Inflation Expectations, FEDS Notes, September 02, 2020.
- Robustness Tests: MM, Section 2.8.
Outline of your third paper and a pdf file of your lead article due Noon, Sunday, April 9
April 10, 12: Student presentations of ther lead article
April 17, 19: Announcement Effects, Open Economy Macro
- Fair, Ray C., Shock Effects on Stocks, Bonds, and Exchange Rates, Journal of International Money and Finance, 2003.
- Fair, Ray C., Wealth Effects on World
Private Saving, International Economics, 2017.
- Lecture 19, Lecture 19
- Lecture 20, Lecture 20
April 24, 26:: Student presentations of the third paper
Third paper due midnight, Wednesday, May 3. Dean's excuse needed for an extension.
Data, News Items, Miscellaneous
- Macro data, data
- Data descriptions, Table A.2, pdf file
- NBER cycles, Cycles
- FP program, FP program
- Example of data mining, Gary Smith, Data Mining
- Example of survivor bias, Gary Smith, Survivor Bias
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- rm1 rm1
- NY Fed expectations, NY Fed expectations