Macroeconomics Homework

Homework #4: Interest Rates, Shocks Econ 352: Macroeconomics

Due at the beginning of class on Tuesday, October 16th

Please note: because of class timing issues, part of this homework has be moved

to Homework #5. When Homework #5 is graded, the question’s score will be

attributed to Homework #4.

Interest Rates and Inflation (8 pts)

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 CPIt−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?

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