The Role Of The Feds In Affecting The Real Variables Of The Economy, And Where The Economy Is Headed Now?

Location

CBM 149

Department

Economics, Computer Science

Session

Session 1

Abstract

This project investigates how the real variables of the economy affect the real interest rates, which are controlled by the Federal Reserve of the United States. The main purpose is to analyze how the interest rates respond to the real economic variables both in the long and short-term period; for this, we examine the relationship with the aid of economic models like ISLM, Keynesian Cross Diagram, Liquidity Preference, Exchange Rates, Stock Markets and the Philip Curve. In economics, all these models are correlated and help us to examine the equilibrium state of the economy and where it is heading toward in the near term. The methodology will consist of graphs drawn from the quarterly time series data. Interest rates will be treated as endogenous variable; for long term we have taken 10-year T-Note, and for short term we have taken federal funds rate and 3-month T-Bill; while the real variables will be treated as exogenous. This implies real interest rates are dependent on real economic variables. The real variables include: inflation (GDP Deflator), unemployment, capital net-flow, net exports, real exchange rates, stock index (DOW JONES, NASDAQ, S&P 500), and real GDP. We will illustrate a simple equation explaining the dependent and independent variables. The goal of this project is to understand how these economic models can be realistically applied to the actual data, help us explain the intuitive correlation between the interest rates and the real variables, and to develop the understanding of how the Fed responded during the financial crisis, and where the economy is headed now. One limitation of our approach is that it focuses on associating economic models to data using simple graphs rather than rigorous empirical estimation methods. As a future extension, we will extend this topic by breaking down the aggregate components of the GDP into segments, addition of more real variables to grasp the inner picture, and analyze the insider economic story through empirical methods.

Comments

Hardik Marfatia is the faculty sponsor of this project.

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Apr 19th, 10:20 AM

The Role Of The Feds In Affecting The Real Variables Of The Economy, And Where The Economy Is Headed Now?

CBM 149

This project investigates how the real variables of the economy affect the real interest rates, which are controlled by the Federal Reserve of the United States. The main purpose is to analyze how the interest rates respond to the real economic variables both in the long and short-term period; for this, we examine the relationship with the aid of economic models like ISLM, Keynesian Cross Diagram, Liquidity Preference, Exchange Rates, Stock Markets and the Philip Curve. In economics, all these models are correlated and help us to examine the equilibrium state of the economy and where it is heading toward in the near term. The methodology will consist of graphs drawn from the quarterly time series data. Interest rates will be treated as endogenous variable; for long term we have taken 10-year T-Note, and for short term we have taken federal funds rate and 3-month T-Bill; while the real variables will be treated as exogenous. This implies real interest rates are dependent on real economic variables. The real variables include: inflation (GDP Deflator), unemployment, capital net-flow, net exports, real exchange rates, stock index (DOW JONES, NASDAQ, S&P 500), and real GDP. We will illustrate a simple equation explaining the dependent and independent variables. The goal of this project is to understand how these economic models can be realistically applied to the actual data, help us explain the intuitive correlation between the interest rates and the real variables, and to develop the understanding of how the Fed responded during the financial crisis, and where the economy is headed now. One limitation of our approach is that it focuses on associating economic models to data using simple graphs rather than rigorous empirical estimation methods. As a future extension, we will extend this topic by breaking down the aggregate components of the GDP into segments, addition of more real variables to grasp the inner picture, and analyze the insider economic story through empirical methods.