(i) An introduction should state the objectives of the paper. Why are the business cycle facts important? How are macro variables classified in terms of timing and direction? What is the purpose of Kydland and Prescott (1990) and what are their findings? You should pay particular attention to their “Introduction,” the methodology used in “Business Cycle Deviations Redefined,” and their findings in “Business Cycle Facts and Regularities,” as summarized in Tables 1, 2, and 4. What will be the contribution of your paper relative to Kydland and Prescott?

(ii) The data analysis portion of the paper, download the Excel data file Macro_Data.xls from Blackboard which contains quarterly time series data from 1960:Q1 – 2015:Q3. It will contain two worksheets. The first is real GDP (in billions of 2009 dollars) and trend GDP (calculated with the HP Filter).

1. Graph both actual real GDP (Y) and HP trend GDP (YT) on the same line chart.

2. For each date t, compute the % deviation of real GDP (Y) from the HP trend (YT) by using the following formula: . Call this new column “GDP Cycle”. This is de-trended GDP. Graph it in a line chart and reference it in the paper.

The second worksheet, “Macro Data” contains data for Consumption (C), Investment (I), Labor Hours (N), Labor Productivity (PR), CPI Price (P), and the M2 Money Supply that have already been de-trended. They are all measured as percent deviation from trend. We are interested in the following statistics regarding the data:

SD = Standard Deviation

RSD of a variable x is the SD of variable x divided by the SD of GDP.

Corr (xt, GDP) = Correlation of variable x at time t with GDP at time t.

Corr (xt-1, GDP) = Correlation of variable x at time t-1 with GDP at time t.

Corr (xt+1, GDP) = Correlation of variable x at time t+1 with GDP at time t.

You should compile both the findings of Kydland and Prescott (Tables 1, 2 and 4) and your analysis in the format of the tables below. From their paper, use “Gross National Product” as GDP, “Consumption Expenditures” as Consumption, “Investment Expenditures” as Investment, “Hours (Household Survey)” as Hours, “GNP/Hours” as Productivity, “M2” as Money Supply, and “CPI” as Prices. In Table 2, your study you should also split the data into three segments (1960-2015, 1960 – 1990, and 1990 – 2015) for the Corr (GDP, Prices) and Corr (Hours, Productivity).

(iii) The results/conclusion portion should summarize your findings and compare it to Kydland and Prescott. How are your findings consistent with their paper? How are they different? Is the “Myth” about the cyclical patter of prices and GDP still true? Given the recent experience of the US economy during the Great Recession, what are some reasons for why or why not?

TABLE 1

Variable x SD RSD Corr(xt-1,GDP) Corr(xt,GDP) Corr(xt+1,GDP)

GDP

Consumption

Investment

Hours

Productivity

Prices

Inflation

Money Supply

TABLE 2

Corr (GDP, Prices) Corr(Hours, Productivity)

1960 – 2015

1960 – 1990

1990 – 2015