econ 240 c
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Econ 240 C. Lecture 13. Midterm 2005. Median: 68, std dev 9, total number 32. The Big Picture. Exploring alternative perspectives Exploratory Data Analysis Looking at components Trend analysis Forecasting long term Distributed lags Forecasting short term. - PowerPoint PPT PresentationTRANSCRIPT
Econ 240 C
Lecture 13
2
3Midterm 2005Score Grade Frequency
90- A+ 1
79-89 A 5
68-78 A- 11
57-67 B+ 14
-56 B 1
Median: 68, std dev 9, total number 32
4The Big Picture
Exploring alternative perspectives Exploratory Data Analysis
• Looking at components Trend analysis
• Forecasting long term Distributed lags
• Forecasting short term
5
Forecast of UC Budget ,2006-07 & 2007-08, Nominal Billions
0
0.5
1
1.5
2
2.5
3
3.5
4
0 200 400 600 800 1000 1200 1400 1600
CA Personal Income
UC
Bud
get
07-08
The story based on a bivariate distributed lag model
6
fORECAST OF UC Budget, 06-07 & 07-08, Nominal Billions
0
0.5
1
1.5
2
2.5
3
3.5
4
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
2006
-07
Fiscal Year
Billi
ons
$
Another Story Based On a Univariate ARIMA Model
7
Part I. CA Budget Crisis
8
CA Budget Crisis
What is Happening to UC?• UC Budget from the state General Fund
9
UC Budget
Econ 240A Lab Four New data for Fiscal Year 2005-06 Governor’s Budget Summary 2005-06
• released January 2005• http://www.dof.ca.gov/
10
UC Budget in Millions of Nominal $
0
500
1000
1500
2000
2500
3000
3500
4000
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Mill
ions
$
Logarithm of UC Budget: Changes in Growth Paths
-1.5
-1
-0.5
0
0.5
1
1.5
68-69
70-71
72-73
74-75
76-77
78-79
80-81
82-83
84-85
86-87
88-89
90-91
92-93
94-95
96-97
98-99
00-01
02-03
04-05
Fiscal Year
lnuc
budb
Fitted through 91-92lnucbudb
12
CA Budget Crisis
What is happening to the CA economy?• CA personal income
13California Personal Income in Billions of Nominal $
0
200
400
600
800
1000
1200
1400
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Billi
ons
$
14
California Personal Income in Billions of Nominal $
10
100
1000
10000
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Billi
ons
$
15
16
CA Budget Crisis
How is UC faring relative to the CA economy?
17
UC Budget Vs. CA Personal Income, 68-69 through 05-06
0
0.5
1
1.5
2
2.5
3
3.5
4
0 200 400 600 800 1000 1200 1400
CAPY B$
UC B
udge
t B $
18
CA Budget Crisis
What is happening to CA state Government?• General Fund Expenditures?
19CA State Government General Fund Expenditures Nominal Millions
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Mill
ions
$
20
CA Budget Crisis
How is CA state government General Fund expenditure faring relative to the CA economy?
21
CA Size of Govt. Vs. SIze of Economy
0
10
20
30
40
50
60
70
80
90
100
0 200 400 600 800 1000 1200 1400
CAPY, B Nom.$
Gen
. Fun
d Ex
. B N
om. $
22
Long Run Pattern Analysis
Make use of definitions: UCBudget = (UCBudget/CA Gen Fnd
Exp)*(CA Gen Fnd Exp/CA Pers Inc)* CA Pers Inc
UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc
23What has happened to UC’s Share of CA General Fund
Expenditures? UC Budget Share = (UC Budget/CA Gen
Fnd Exp)
24UC's Budget Share, 1968-69 through 2005-06
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Perc
ent
25
26
27
UC Budget Crisis
UC’s Budget Share goes down about one tenth of one per cent per year• will the legislature continue to lower UC’s
share? • Probably, since competing constituencies such
as prisons, health and K-12 will continue to lobby the legislature.
28What has happened to the size of California Government Expenditure Relative to Personal Income? Relative Size of CA Government = (CA
Gen Fnd Exp/CA Pers Inc)
29The Size of CA State Government Relative to the Economy
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Perc
ent
30
California Political History Proposition 13
• approximately 2/3 of CA voters passed Prop. 13 on June 6, 1978 reducing property tax and shifting fiscal responsibility from the local to state level
Gann Inititiative (Prop 4)• In November 1979, the Gann initiative was
passed by the voters, limits real per capita government expenditures
31
CA Budget Crisis
Estimate of the relative size of the CA government: 6.50 %
Estimate of UC’s Budget Share: 3.25%
32CA Budget Crisis: Pattern Estimate of UC Budget UC Budget = UC Budget Share*Relative
Size of CA Government*CA Pers Inc Political trends estimate UC Budget = 0.0325*.065*1324.1 $B =$
2.80 B estimate Governor’s proposal in January: $ 2.81 B
33
Econometric Estimates of UCBUD
Linear trend Exponential trend Linear dependence on CAPY Constant elasticity of CAPY
34
Econometric Estimates
Linear Trend Estimate UCBUDB(t) = a + b*t +e(t)
• about 3.0 B• Too optimistic
35UC Budget In Billions of Nominal $
0
0.5
1
1.5
2
2.5
3
3.5
4
0 5 10 15 20 25 30 35 40
Fiscal year
Billi
uons
$
36
Econometric Estimates
Logarithmic (exponential trend) lnUCBUDB = a + b*t +e(t) simple exponential trend will over-estimate
UC Budget by far
37
UC Budget In Billions of Nominal $
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
0 5 10 15 20 25 30 35 40
Fiscal year
Billi
uons
$
38
39
Econometric Estimate
Dependence of UC Budget on CA Personal Income
UCBUDB(t) = a + b*CAPY(t) + e(t) looks like a linear dependence on income
will overestimate the UC Budget for 2005-06
40
UCBudget Vs. CA Personal Income, 68-69 through 05-06
0
0.5
1
1.5
2
2.5
3
3.5
4
0 200 400 600 800 1000 1200 1400
CAPY Nominal Billions
UC B
udge
t Nom
inal
Bill
ions
41
Econometric Estimates
How about a log-log relationship lnUCBUDB(t) = a + b*lnCAPY(t) + e(t) Estimated elasticity 0.847 autocorrelated residual fitted lnUCBUDB(2005-06) = 1.24886
• $3.49 B actual (Governor’s Proposal) = 1.03816
• $2.81B
42
43
44
45
46
Econometric Estimates
Try a distributed lag Model of lnUCBUDB(t) on lnCAPY(t)• clearly lnUCBUDB(t) is trended (evolutionary)
so difference to get fractional changes in UC Budget
• likewise, need to difference the log of personal income
47
Identify dlnucbud
48
49
50
Identify dlncapy
51
52
53
Estimate ARONE Model for dlncapy
54
Satisfactory Model
55Estimate ARONE Model for
dlncapy(t) Orthogonalize dlncapy and save residual need to do transform dlnucbudb dlnucbudb(t) = h(Z)*dlncapy(y) + resid(t) dlncapy(t) = 0.72*dlncapy(t-1) + N(t) [1 - 0.72Z]*dlnucbudb(t) = h(Z)* [1 -
0.72Z]*dlncapy(t) + [1 - 0.72Z]*resid(t) i.e. w(t) = h(Z)*N(t) + residw(t)
56
Distributed Lag Model
Having saved resid as res[N(t)] from ARONE model for dlncapy
and having correspondingly transformed dlnucbud to w
cross-correlate w and res
57
58
Distributed lag model
There is contemporary correlation and maybe something at lag one
specify dlnucbud(t) = h0 *dlncapy(t) + h1
*dlncapy(t-1) + resid(t)
59
60
61
62Try an AR(6) AR(8)residual for dlnucbudb
63
64
65
66
Try a dummy for 1992-93, the last recession, this is the once and for all decline in UCBudget mentioned by Granfield
There is too much autocorrelation in the residual from the regression of lnucbud(t) = a + b*lncapy(t) + e(t) to see the problem
Look at the same regression in differences
67
UCBudget Vs. CA Personal Income, 68-69 through 05-06
0
0.5
1
1.5
2
2.5
3
3.5
4
0 200 400 600 800 1000 1200 1400
CAPY Nominal Billions
UC B
udge
t Nom
inal
Bill
ions
05-06
92-93
68UC Budget In Billions of Nominal $
0
0.5
1
1.5
2
2.5
3
3.5
4
0 5 10 15 20 25 30 35 40
Fiscal year
Billi
uons
$
69
70
71
72
73Distributed lag Model dlnucbud(t) = h0 *dlncapy(t) + h1 *dlncapy(t-
1) + dummy (1992-93) + resid(t) dlnucbud(t) = h0 *dlncapy(t) + h1 *dlncapy(t-
1) + dummy (1992-93) + dummy(2002-03) + resid(t)
dlnucbud(t) = h0 *dlncapy(t) + dummy (1992-93) + resid(t)
74
75
76
77
78
Distributed Lag Model
dlnucbud(t) = h0 *dlncapy(t-1) + dummy (1992-93) + resid(t)
79
80
81
82
83Fitted fractional change in UC Budget is 0.032 (3.2%)versusGovernor’s proposal of 0.033 (3.3%)
84Conclusions Governors proposed increase in UC Budget
of 3.3% is the same as expected from a Box-Jenkins model, controlling for income
The UC Budget growth path ratcheted down in the recession beginning July 1990
The UC Budget growth path looks like it ratcheted down again in the recession beginning March 2001
Logarithm of UC Budget: Changes in Growth Paths
-1.5
-1
-0.5
0
0.5
1
1.5
68-69
70-71
72-73
74-75
76-77
78-79
80-81
82-83
84-85
86-87
88-89
90-91
92-93
94-95
96-97
98-99
00-01
02-03
04-05
Fiscal Year
lnuc
budb
Fitted through 91-92lnucbudb
86
87
Try estimating the model in levels
88
89
90
91
92
93
94
Forecast of UC Budget ,2006-07 & 2007-08, Nominal Billions
0
0.5
1
1.5
2
2.5
3
3.5
4
0 200 400 600 800 1000 1200 1400 1600
CA Personal Income
UC
Bud
get
07-08