In this exercise you will estimate the effect of oil prices on macroeconomic activity, using monthly data on the Index of Industrial Production (IP) and the monthly measure of O1 described. The data can be found on the textbook website,
https://www.pearsonhighered.com/stock_watson, in the file USMacro_Monthly.
a) Compute the monthly growth rate in IP, expressed in percentage points, ip_growth = 100 x ln(IPt/IPt-1). What are the mean and standard deviation of ip_growth over the 1960: M1-2012:M12 sample period? What are the units for ip_growth (percent, percent perannum, percent per month or something else)?
b) Plot the value of Ot, Why are so many values of Ot equal to zero? Why aren't some values of Ot negative?
c) Estimate a distributed lag model by regressing ip_growth onto the current value and 18 lagged values of Ot, including an intercept. What value of the HAC standard truncation parameter m did you choose? Why?
d) Taken as a group, are the coefficients on Ot statistically significantly different from zero?
e) Construct graphs like those, showing the estimated dynamic multipliers, cumulative multipliers and 95 % confidence intervals. Comment on the real world size of the multipliers .
f) Suppose that high demand in the United States (evidenced by large values of ip_growth) leads to increases in oil prices. Is Ot exogenous? Are the estimated multipliers shown in the graph in (e) reliable? Explain.