Homework Assignment No. 1: due January 24, 1997

Read the Nelson and Schwert American Economic Review paper on short-term interest rates as predictors of inflation. The Eviews dataset F533HW1.WF1 contains monthly inflation and interest rates for the period 1913:02-1994:10. Your assignment is to reproduce the major results in the Nelson and Schwert paper for their time period (1953:01-1971:07), and to see how their results change using other sample periods.

Also, how would you predict the real rate of interest using the Nelson-Schwert approach? Plot and discuss the time series behavior of the (ex ante) real rate over the 1913-94 period.

Finally, how might you use GMM to estimate the relation between inflation and interest rates? Try it.

Note: You do not have to use Eviews. The same data are available in an ASCII data file, F533HW1.TXT. The format is (2F10.6) with inflation in the first column and interest rates in the second column. You may use any computer program that you know how to use.

This assignment is available in Acrobat's portable data format (.pdf). The file is about 16K and can only be viewed (and printed) using a copy of Acrobat Reader. Click here to download this document.

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