**Economics 111**

**Homework Assignment #1**:

Your first task will be to download four interest rate data series from the Federal Reserve Board website into Excel. You can plot the data on the Fed website (really easy) or plot it in EXCEL (a little bit harder). You then will perform some simple statistical calculations with the data and offer a brief verbal description. *Feel free to work with classmates on this assignment*.

Go to the federal reserve website listed on the course syllabus (www.federalreserve.gov ) There are a few ways to proceed. I recommend to click on "view all" at the bottom right of the page (just under "selected interest rates-H.15." Then click on “Data Download Program” at the top right of the page. Find “Interest Rates” and click on “selected interest rates (H.15).” You then should choose the “build package” option on the left. You can then follow the four steps for each interest rate series that you want to add to your package. Before describing these four steps I want to identify the four interest rate series you will be examining: *you should choose (1) the federal funds rate; (2) the U.S. government securities/Treasury constant maturity/nominal with a maturity of 1 year; (3) the U.S. government securities/Treasury constant maturity/nominal with a maturity of 10-years; and (4) the corporate bond/Moody’s seasoned Baa rate. For each choose the “monthly” frequency*.

Now consider the four steps. Step 1 always is “select interest rates.” Then click continue. Step 2 is to choose an instrument. To be concrete, start by highlighting the “federal funds rate,” and then click continue. Step 3 is to choose a maturity; there is only one option for the federal funds rate which is “overnight.” Then hit continue. Step 4 is to choose a frequency; here choose “monthly.” And then click on “add to your package.” Once an interest rate series has been so added, click on “add more” to choose the next interest rate series. Once your package contains these four interest rates, select “format package” near the top of the page. Select “dates” (rather than "observations") and choose the date range from September 1955 to August 2104, giving you about 60-years worth of monthly data. Also select “Excel 2003 or newer” under file type; “include” under data labels; “series in columns” under layout. Then select “go to download” at bottom of page. Now click on “view chart” at the bottom of the page. Plot the series one at a time, starting with the federal funds rate, then the 1-year Treasury rate, etc. until you have all four rates plotted. Also, select “U.S. recessions” at the top of the page for recession shading. (For those familiar with plotting in Excel, you can plot the four interest rate series there if you prefer, after you have downloaded the data to Excel.)

Now let’s analyze the chart and data. What do you observe about the general pattern of the four interest-rate series? With the help of visual inspection and summary statistics discussed next, you should gain insight about the key characteristics such as the degree of co-movement of the various interest rate series, the relative bounciness of the series, and the relative level of the series. Simple statistics (available in Excel) should help confirm visual impressions. To download the data to Excel, simply go to download at the bottom of the chart page and finally select “download file.” (I got a type of error message and simply clicked “yes” when given options.)

- Specifically, I want you to compute two summary statistics. First, compute the simple correlation coefficients for each pair of interest rates series (
**six coefficients in total**) over the entire 60-year date range. The*correlation coefficient*is a measure of the relationship between two random variables; the coefficient lies between -1 and +1. A value of zero generally means no relationship. A value of 1 (-1) means that the two variables are perfectly positively (negatively) correlated; in this extreme case all the observations lie on a straight line with positive (negative) slope. In Excel, the correlation command (along with an illustrative variable/date range) is: =correl(B8:B715,C8:C715); find six blank cells in your spreadsheet near the data and type in this correlation command with the appropriate variable/date range. Be careful to type in the correct punctuation in the Excel commands. - Next, you should compute the standard deviations for each of the four interest rate series. The
*standard deviation*is a measure of how much the data for a given series bounce around relative to the average (for those familiar with probability and statistics, it is a measure of the spread of the distribution of a given random variable about the mean). In Excel, the standard deviation command (along with an illustrative date range) is: =stdev(c8:c715). - You
*should*turn in the raw data or the chart. You*not***should**present the six correlation coefficients, carefully labeled including the date range, with a one sentence summary about the co-movement of the four interest rates. You also**should**present the four standard deviations, carefully labeled, with a one sentence summary about the relative bounciness of the four interest rates, focusing on the variation across maturities.

Subject | Business |

Due By (Pacific Time) | 10/14/2014 11:00 am |

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