Business Forecasting and Data AnalysisCoursework Assignment no. 1UK Inflation forecast reportOnly one method of submission will be accepted by handing in with the appropriate form to the Undergraduate Centre in Richmond Building before 16:00 on Friday 6 December 2013. As well as providing a written version of your assignment, you should also submit a copy of your work in electronic form, to include all relevant EViews computer output, on a CD.Working must be on an individual basis. Plagiarism through borrowing of files from others is a disciplinary offence. Similarly, you should not lend your work to others, or you may be accused of plagiarism yourself. As stated in the unit outline, this assignment counts for 50% of the marks in this unit.Guideline for length of submission: maximum 2000 words excluding graphs and tables and any appendices.The SoftwareEViews is the required software for undertaking this assignment.BackgroundOne of the Bank of Englands two core purposes is monetary stability. Monetary stability means stable prices low inflation and confidence in the currency. Stable prices are defined by the Governments inflation target, which the Bank seeks to meet through the decisions taken by the Monetary Policy Committee. A principal objective of any central bank is to safeguard the value of the currency in terms of what it will purchase. Rising prices inflation reduces the value of money. Monetary policy is directed to achieving this objective and providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policy usually operates in the UK through influencing the price at which money is lent the interest rate. However, in March 2009 the Banks Monetary Policy Committee announced that in addition to setting Bank Rate, it would start to inject money directly into the economy by purchasing assets often known as quantitative easing. This means that the instrument of monetary policy shifts towards the quantity of money provided rather than the price at which the Bank lends or borrows money. Low inflation is not an end in itself. It is however an important factor in helping to encourage long-term stability in the economy. Price stability is a precondition for achieving a wider economic goal of sustainable growth and employment. High inflation can be damaging to the functioning of the economy. Low inflation can help to foster sustainable long-term economic growth.Further Readinghttp://www.bankofengland.co.uk/monetarypolicy/Pages/default.aspxThe dataThe data consist of quarterly observations for the UK economy over the period 1992Q2-2012Q4. Names and definitions of variables are given below.You can download the data for the UK economy directly into EViews by downloading the file uk_data.wf1 from moodle. (Note that this is already an EViews workfile).The variables available to you are described below.NameDescriptionINFLPercentage change of Consumer Price Index (CPI)UUnemployment rate (percentage)GDPReal Gross Domestic Product, billions of s (Seasonally Adjusted)IRCentral Bank Policy Interest RateFTSE100Share Index of the 100 companies listed on the London Stock ExchangeM4Money supply, millions of s (Seasonally Adjusted)EXCHExchange rate (s per US$)What you are required to doYou should write a report which considers (i) the evolution of inflation and the rest of the underlying series in the workfile and (ii) generate forecasts on inflation using non-structural, structural models, and a combination of the two. The items listed below should form the basis for your line of investigation (using EViews) and report. Your report should include commentary and discussion interpreting your results. Where new variables have been created you should explain what has been done. Make sure your tables are self-explanatory. You should also provide a short conclusion summarising your findings. [Note that a proper academic paper would include a review of relevant literature this is not required in the assignment]. You should pay some attention to the presentation and formatting of your report, which should be sufficient for an internal report, but there is no need to go to extraordinary lengths to obtain publishable quality output. Graphs should have titles and be suitably labelled.Essentials you must include1. Suitable graphs showing the evolution of the underlying series included in the workfile.2. Conduct and report unit-roots tests on the underlying series using the Augmented Dickey Fuller (ADF) unit-root statistic. Are the series stationary? If not, which transformations are needed to render them stationary?3. Compute, plot and interpret the Auto-Correlation Function (ACF) and the Partial Auto-Correlation Function (PACF) of inflation. What AR, MA or ARMA process seems most appropriate?4. Compute the AIC and BIC information criteria for an AR(1), AR(2), AR(3), MA(1), MA(2), MA(3), ARMA(1,1), ARMA(1,2), ARMA(2,1) and ARMA(2,2) process for the inflation series. Which models are suggested by these two selection criteria?5. Use the best five models selected in the previous question to perform inflation forecasts over the period 2010Q1-2012Q4 and evaluate their forecast performance.6. Estimate the following version of the Phillips curve, relating inflation to the change in unemployment:????????=??1+??2????+???? (1)interpret the results and illustrate/interpret the correlogram for the least squares residuals.7. Test for serial correlation of the least squares residuals of Eq. (1) up to four lags using the Breusch-Godfrey test for autocorrelation and interpret the results.8. Test for heteroskedasticity of the residuals of Eq. (1) using the White test and interpret the results.9. Test for misspecification using the Ramsey RESET test and interpret the results.10. Use Eq. (1) to perform inflation forecasts over the period 2010Q1-2012Q4 and compare them with the actual values of inflation.Extensions to enhance your investigation (and improve your mark)1. Discuss the evolution of the series (and possibly their transformations, e.g. the growth of UK real GDP) and relate them to specific (economic) events.2. Presentation/illustration/discussion of your results/tables/figures is relevant.3. Briefly discuss the workings of the UK Bank of England Monetary Policy Committee.4. If you believe that other AR, MA and/or ARMA processes are relevant for the inflation series and which are not indicated under question (4), try them.5. Amend your model in Eq. (1), by including any other relevant series (or their transformed counterparts) already provided in the workfile, to see whether you can improve your in-sample specification and out-of-sample forecast performance.6. Combine structural and non-structural models so as to check whether you can improve your out-of-sample forecast performance.
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.
[order_calculator]