Introduction to Econometrics 3rd Edition by James Stock, Mark Watson

Exercise 3

Macroeconomists have also noticed that interest rates change following oil price jumps. Let R t denote the interest rate on 3-month Treasury bills (in percentage points at an annual rate). The distributed lag regression relating the change in R t ( R t ) to O t estimated over 1955:1-2000:IV is

a. Suppose that oil prices jump 25% above their previous peak value and stay at this new higher level (so that O t = 25 and O t+l = O t +2 = • • • = 0). What is the predicted change in interest rates for each quarter over the next 2 years
b. Construct 95% confidence intervals for your answers to (a).
c. What is the effect of this change in oil prices on the level of interest rates in period t + 8 How is your answer related to the cumulative multiplier
d. The HAC F-statistic testing whether the coefficients on O t and its lags are zero is 4.25. Are the coefficients significantly different from zero