WORKING WITH MACROECONOMIC DATA

For data to use in these exercises, go to the Federal Reserve Bank of St. Louis FRED database at fred.stlouisfed.org.

1. Using annual data since 1956, create scatter plots of the following variables:

a.

b. CPI inflation rate against the cyclical unemploy­ment rate. (The cyclical unemployment rate is the actual unemployment rate minus the natural unem­ployment rate, which is variable NROU in the FRED database.)

c. Change in the CPI inflation rate from the previous year against the cyclical unemployment rate.

Discuss your results in light of the theory of the Phillips curve.

2. In this exercise, you are going to examine the histori­cal data on Okun's Law, which we used in our dis­cussion of the costs of unemployment. The level form of Okun's Law in Eq. (3.5) states that the output gap,

equals cyclical unemployment, u — U, multi­plied by 2. First, get the Congressional Budget Office's quarterly estimates of the natural rate of unemployment (FRED series NROU) and real poten­tial GDP (FRED series GDPPOT) from the FRED database. Second, collect quarterly data on real GDP from the FRED database in each quarter beginning in 1960, and then use it with the CBO potential output data series to calculate the output gap at each date. Third, download the quarterly average of monthly data on the unemployment rate from the FRED data­base beginning in 1960. Use those quarterly data and the CBO's natural rate series to calculate cyclical unemployment. Fourth, draw a graph of the output gap (on the vertical axis) versus cyclical unemploy­ment (on the horizontal axis). Also, on the same set of axes, draw a straight line through the origin with a slope of 2. Do the data points lie close to this line?

3. For each month since January 1960, calculate the share of total unemployment accounted for by people unemployed for 15 weeks or more. How is this ratio related to the business cycle (for peak and trough dates, see Table 8.1), and to the overall unemploy­ment rate? What are the implications of these results for a policymaker who wants to assess the costs of a recession?

4. Download data from FRED on inflation expectations from the University of Michigan survey of consum­ers. In Excel, plot the change in the expected infla­tion rate from 12 months earlier. In which periods did expected inflation decline by more than one per­centage point over the 12 months? In which periods did expected inflation rise by more than one percent­age point over the 12 months? Are the months of significant declines or increases in expected inflation associated with a particular stage of the business cycle?