Replication Exercise:
Paper: Neely, C. Rapach, D. Real Interest Rate Persistence: Evidence and Implications, Federal Reserve Bank of St. Louis Review, Vol. 90, No. 6 (November- December 2008), pp. 609-642
Reference Material:
Sections 1.1 to 1.4 of the book by Choi (Almost all about unit roots, 2015, Cambridge University Press. (Available in LMS)
Part 1: Implications of Unit Root
Read Choi (2015, Sections 1.1 to 1.4). Provide a summary of the implications of the presence of unit root in economic and financial time series (use at least three examples discussed by Choi), in about 500 words.
Part 2: Unit Root in Real Interest Rate
Read Neely and Rapach (2008) and provide a non-technical summary of the paper (objective, main points and arguments, main findings and their implications), in about 500 words.
Note that the reading and summary can cover the materials up to the page 623 of Neely and Rapach (2008). You do not need to cover further than this page.
Data Details
The ASCII data file DATA_REALRATE.TXT contains quarterly observations for 1953:1- 2007:3 for the
a) 3-Month Treasury Constant Maturity Rate
b) PCE deflator inflation rate
Personal Consumption Expenditures: Chain-type Price Index (2000=100)
c) Ex post real interest rate:
Three-month Treasury bill rate minus the realized inflation rate in the subsequent quarter
d) Consumption growth rate
Real Personal Consumption Expenditures
Quarterly data, annualized growth (see growth definition below)
Part 3: Basic Data Analysis
Conduct the basic data analysis of the above time series in the data set, presenting their time plots and SACF.
Discuss their time series properties including the basic components, the degree of persistence, and the degree of dependence, in about 500 words.
Part 4: Replication
Replicate the unit root testing and co-integration testing results reported Tables 2 and 3 of Neely and Rapach (2008).
Do not need to replicate MZ test and Johansen test (trace) results: ADF test results and Engel- Granger co-integration results only.
Provide a summary of the results and discuss their implications in about 500 words. End of the Exercise
Attachment:- Data realrate.rar