Assignment:
Please note: because of class timing issues, part of this homework has be moved to Homework. When Homework is graded, the question's score will be attributed to Homework.
Interest Rates and Inflation
1. Go to the "Federal Reserve Economic Data" (FRED) database at https://research.stlouisfed.org/fred2/
2. Find the three-month treasury bill: secondary market rate, and the consumer price index for all urban consumers: all items.
3. Download both at a monthly frequency from 1947-present
4. Calculate the lagged yearly net inflation rate from the CPI data in percent terms. (For period t, divide period t's CPI by period t - 12's CPI. This is gross inflation. Subtract the gross inflation by 1 and multiply by 100 to get the net inflation rate in percent:
πt-12→t = 100 ·(( CPIt/CP It-12) - 1) )
Plot and compare the net inflation rate and the three-month treasury bill together from 1948- present: what do you notice? In economics, you frequently see the "Fisher Equation", which is i ≈ r + π, or "the nominal interest rate is (to a first-order approximation) equal to the real interest rate plus the inflation rate." If the three-month treasury bill is i, and the inflation rate you calculated is π, does your graph give you any information about whether r or π can explain what's going on with i? That is, when r or π moves, i moves by definition. We see a lot of
variation in i on your graph. Qualitatively, how much can be attributed to π vs. r?