Question: In this exercise you will estimate the effect of oil prices on macroeconomic activity using monthly data on the Index of Industrial Production (IP) and the monthly measure of Ot described in given Exercise. The data can be found on the textbook Web site www.pearsonhighered.com/stock_watson in the file USMacro_Monthly.

a. Compute the monthly growth rate in IP expressed in percentage points, ip4rowth, = 100 X ln(IPt/IPt-1). What are the mean and standard deviation of ip _growth over the 1952:1-2009:12 sample period?

b. Plot the value of Or Why are so many values of 01 equal to zero? Why aren't some values of Ot negative?

c. Estimate a distributed lag model of ip_growth onto current and 18 lagged values of Ot. What value of the HAC standard truncation parameter in did you choose? Why?

d. Taken as a group, are the coefficients on Ot statistically significantly different from zero?

e. Construct graphs like those in Figure 15.2 showing the estimated dynamic multipliers, cumulative multipliers, and 95% confidence intervals. Comment on the real-world size of the multipliers.

f. Suppose that high demand in the United States (evidenced by large values of ip_growth) leads to increases in oil prices. Is Ot exogenous? Are the estimated multipliers shown in the graphs in (e) reliable? Explain.

Exercise: Increases in oil prices have been blamed for several recessions in developed countries. To quantify the effect of oil prices on real economic activity. researchers have done regressions like those discussed in this chapter. Let GDPt denote the value of quarterly gross domestic product in the United States and let Yt -= 1001n(GDPt/GDPt-1) be the quarterly percentage change in GDP. James Hamilton, an econometrician and macroeconomist, has suggested that oil prices adversely affect that economy only when they jump above their values in the recent past. Specifically, let Ot equal the greater of zero or the percentage point difference between oil prices at date t and their maximum value during the past year. A distributed lag regression relating Yt and Ot, estimated over 1955:I-2000:IV, is

b. Construct a 95% confidence interval for your answers in (a).

c. What is the predicted cumulative change in GDP growth over eight quarters?

d. The HAC F-statistic testing whether the coefficients on Ot and its lags are zero is 3.49. Are the coefficients significantly different from zero?