Macroeconomics 101

Methods for Macroeconomic Research

Summer 2010

Instructor: Freddy Cama, WH 222, 646-2126 (Macro dept: 646-3901), email: fcama@imf.org.
Time and Location: T, Th 11:45 - 1:00, San Marcos main building 108.
Tuesday 10:30 - 11:30
O¢ ce Hours: Wednesday 12:00 - 1:30
Thursday 1:30 - 3:00.
Textbook: F. Canova (2007) “Methods for Applied Macroeconomic Research”.
Material: Chapters 3, 4, 5 and 6
This course is an applied one for macroeconomic research. The goal of this course is to give tools for
research and adapt the student to the working climate on macroeconomics. The course has 5 lectures and
is strongly based on Canova (2007), additionally we are including some relevant papers from prestigious
economic and statistical journals; we recommend strongly that students check out these papers for some
extensions or details.
Grading: There will be daily quizzes and a …nal exam. They will count toward the grade as follows.

Pop Quiz 60%

Homeworks 15%
Final 25%.

The …nal exam will be on Friday, January 15 between 3:30 p.m to 5:30 p.m.
In addition to these exams there will be dialy quizzes which would be graded the same day. they will
consist in basic calculations, matlab (stata) codes or some mathematical proofs. After you learn basic
techniques of extracting information at the beginning of the course, you will be ready to have your …rst
homework; indeed after each lecture there will be a homework. These homeworks will barely a¤ect the
grade you receive in the course, but they will be critical for the …nal exam because the exan will cover the
homeworks and theoretical discussions. That is why you need basic mathematical skills to pass the course.
Further information about the exam will be provided later.
 Description of the Course
The course will be centered around six main topics covering the notion of basic econometrics, extracting
cyclical information, Vector Auto Regressive (VAR), Bayesian VAR models, Real Exchange Rate models and
crisis models using limited-dependent-variable econometric speci…cations. The purpose of the …rst chapter
( We called this lecture or chapter 0 or basic) is to do a quickly review of basic courses of econometricsthat
you’ve already taken. This lecture will be 2 hours long, therefore we recommend you to be familiar with
all the subchapters or prepare some questions related to each topic. The daily quizz will include some easy
task usually consisting of basic calculations, matlab (or stata) codes or some mathematical proofs. All the
assignments will be done individually and the homeworks will be done in groups of 3 or 4 students. Each
group will turn in one write-up.
The purpose of written homework in this course is to use the tools we are learning in the course and
develop skills in understanding and communicating results from some particular questions in the …eld of
macroeconomics. It is not to give you busy work, drill or some . Don’t think of your homework paper as a
certi…cate proving that you have done or tried to do the best on the assignment. Think of it as an exercise in
learning and in reporting what you have learned, likewise you could try to put on the paper some discussions
related to the below topics, all they are welcome in the research …eld, let’s discuss!. Please be clear on your
statements because there is a lot of truth in the statement if you can’t explain it, you don’t understand it,
and it is true as well that (this is mine) if you learnt it withouth some understanding, pretty sure you will
forget it tomorrow, be e¢ cient!. Don’t write to the instructor (who already knows how to do the problems),
but explain your solutions to someone who needs help, perhaps a classmate who has been sick. Start at the
beginning and be clear, logical and complete. The ultimate test of what you write is this: can someone learn
from your paper? Easily? Remember, the reader will see only what you wrote, not what you meant to say.
So it must all be there, and be accurate. Make your paper reader friendly. We will talk some about this in
class.
The …rst chapter talks about how to deal with the measurement of cycles, we have interesting algorithms
like beveridge and Nelson methodology but it is based on strong assumptions about how the shocks are
correlated, we need to know what these assumptions are; a purpose of the course is to give to students what
are the advantages and disvantages of the methodologies as well as the limitations. The second chapter
is designed for giving you the basic of programming, then use these tools for performing montecarlos and
boostrap methods. The third chapter is aimed to know more about the VAR models, we will discuss
speci…cations and forecast from these kind of models, likewise we will provide some format for the results
and extend alternative presentations using bootstrap methods in the impulse response functions. At the end
of the chapter we will see some applications using fan chart models and comparing the results with DSGE
models. The fourth chapter wants to introduce the International-Monetary-Fund methods for assessing the
dynamic of real exchange rate in low income countries. Basicly we present three methods: the …rst one based
on disalignments of the current account which would be helpful when we want to know how much the real
exchange rate would need to appreciate for closing this current account gap, the second one is realted to the
external sustainability using a proxy of net foreign assets, the last methodology is the typical one which is
knowly used in the macroeconomic research …eld the …fth chapter aims to use crisis models using logit panel
methods; we would have applications using the crisis data from southamerica.
The purpose of working in groups is twofold. First, by sharing ideas you will be able to learn from each
other, allowing you to clarify what you get out of the lecture and reading. Second is to get you accustomed
to working with other people, a likely situation in your future jobs. The goal for an assignment is to get each
group member to understand the entire assignment. Frequently a major part of an assignment will be to
summarize the various components. In order to do this you will need to understand the entire assignment.
Therefore you should not divide the problems among your group members, but have each person work on
each part and discuss what you come up with. Again the idea of the course is to give you tools, the duration
of the osurse is just a week but we expect you could learn much you can. Good luck!.

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 Chapters
The course will be centered around several main topics covering the extraction of cyclical information,
sampling methods, VAR models, real Exchange Rate disalignments and contagious models.

Chapter 0: (Macro) econometrics

1. Ordinary Least Squares [12]; [20]

1.1 Gauss Theorem

1.2 Inference
1.3 Prediction

2. Maximum Likelihood [12]; [20]

2.1 Cramer-Rao lower bound

2.2 Inference
2.3 Application

3. Data features

3.1 Heterocedasticity,
3.2 Autocorrelation
3.3 Multicolinearity

4. Generalized Least Squares

4.1 E¢ cient Estimation

4.2 Autocorrelation, consequences for OLS
4.3 heterocedasticity, consequences for OLS
4.4 Inference

5. Non-Linear Least Squares

5.1 Numerical methods

5.2 Starting values and convergence criteria
5.3 Applications

6. Limited Dependet Variable

6.1 Linear probability model

6.2 Preferences, choice and modeling
6.3 Functional forms
6.4 Estimation
6.5 Inference

7. Panel Data

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Chapter 1: Extracting, Filling and Measuring Cyclical Information
1. Statistical Decompositions, de…nitions [8, Ch3]
1.1 Traditional methods
1.1.1 Polynomics functions
1.1.2 First di¤erences
1.2 Beveridge-Nelson (BN) decomposition [4]; [27]; [22]; [28]
1.2.1 Univariate …lter [26]
1.2.2 Multivariate …lter
1.2.3 Caveats
1.3 Unobservable Components (UC) decompositions [19]
1.4 Regime shifting decomposition
2. Hybrid Decompositions [8]; [13]
2.1 The Hodrick and Prescott (HP) Filter [16]
2.1.1 Univariate …lter
2.1.2 Multivariate …lter
2.2 Exponential smoothing (ES) …lter
2.3 Moving average (MA) and non-linear …lters [30]
2.4 Band Pass (BP) …lters; Baxter & King [3]
3. Economic Decompositions [8]
3.1 Blanchard and Quah (BQ) Decomposition [5]
3.2 King, Plosser Stock and Watson (KPSW) Decomposition [29]
3.3 Time Aggregation, Cycles and Spectral Analysis [15, Ch6]; [8, Ch1]
3.4 Persistence and Cycles
3.5 Collecting Cyclical Information [7]
4. Classical Economics
4.1 Output Gap and measuring cyclical information [25]; [24]
4.1.1 Production function
4.1.2 Multivariate methodology with non-observed components
5. Interpolation and curve …tting [32, Ch3]
5.1 Linear interpolation
5.2 Lagrange Polynomial
5.3 Newton Polynomial
5.4 Chebychev polynomial
5.5 Curve …tting
5.6 Fourier tranformations
6. Denton’s interpolation method [11]; [9]; [1, Ch6]
7. Chow and Lin’s interpolation method [10]
8. Other methods
8.1 De Jong
8.2 Casas et. al.
8.3 Litterman’s method [23]

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Chapter 2: Simulation Methods
1. Pseudo random numbers
2. Montecarlo experiments
3. Boostrapp

3.1 Block Bootstrapp

3.2 Stationary Block bootstrapp [2]

4. Applications

4.1 Impulse responses

4.2 Growth and terms-of-trade shocks

Chapter 3: VAR and BVAR models

1. The Wold Theorem
2. Testing the speci…cation
3. Moments and parameter estimation
4. Reporting VAR results [8, Ch4]; [30]

4.1 Impulse responses

4.2 Asymtoptic con…dence intervals
4.3 Boostrap con…dence intervals

5. Identi…cation
6. Forecasting [15, Ch4]

6.1 Principles of forecasting

7. Asymetrics VARs
8. Fan Charts models using VAR and BVAR

8.1 Public debt

8.2 In‡ationary Expectations

9. Validating DSGE models with VARs

Chapter 4: Relative Prices and Disalignments

1. Introduction and review of literature [17] [31]

1.1 Real Exchange Rate models, the theory

1.2 Real Exchange Rate models, the empirics

2. Macroeconomics Balance Approach [18, Ch2]

1.1 Theoretical background and de…nitions

1.2 Estimations results
1.3 Current Account Norms

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 1.4 Exchange Rate assessments

3. Equilibrium Real Exchange Rate Approach [18, Ch3]

1.1 Theoretical background and de…nitions

1.2 Panel Unit Roots
1.3 Estimations results
1.4 Equilibrium Real Exchange Rate
1.5 Exchange Rate assessments

4. External Sustainability [18, Ch4]

1.1 Theoretical background

1.2 Choosing a benchmark level for Net Foreign Assets
1.3 An Application Using 2004 NFA as the Benchmark Level
1.4 Current Account, Net Foreign Assets and Exchange Rate Adjustment

5. Fiscal e¤ect and Real Exchange Rate

5.1 Dutch disease

5.2 Salter-Swan e¤ect
5.3 Applications: The chilean case

Chapter 5: Crisis and contagious models

1. Some theory [2]; [6]; [21]

1.1 Firts generation models

1.2 Second generation models
1.3 Third generation models

2. Crisis models [14]

2.1 Speci…cation
2.2 Inference
2.3 Applications

References
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6
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