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Reaction functions

Student: Nam Vu Instructor: Dr. Jeff Ankrom. Reaction functions. In the Chinese and US contexts. Business cycle.

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Reaction functions

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  1. Student: Nam Vu Instructor: Dr. Jeff Ankrom Reaction functions In the Chinese and US contexts

  2. Business cycle The modern business cycles are finally defined by Lucas in 1977 as the deviations of aggregate real output from the trend, which however, is not yet a complete definition in the sense that he did not precisely define the term trend. Hodrick-Prescott filter

  3. where i and p are the target and actual inflation rate, C is a constant of 1.5, y denotes the percentage deviation of real gross domestic product (GDP) from a target, and r’ is an estimate of the “equilibrium” real Fed funds rate. i(t-1) denotes the last quarter’s Fed Funds Rate, and i represents the standard Taylor Rule predicted value. Construction of Taylor rule

  4. Construction of Taylor rule

  5. China’s version of the rule

  6. Assuming we have two known time series X and Y, the Granger causality test was conducted by running a series of F tests on lagged values of a specific time series X to see if the X series can provide statistically significant information about the future value of the time series Y. Mathematically, the test involves estimating the following regressions: Xt=∑αiYt-1 + ∑βjXt-j + u1t Yt=∑µXt-1 + ∑ΩjYt-j + u2t where the disturbances u1tand u2tare not correlated. The tests use 1 lagged period. Run a test on the direction of two time series: Foreign Reserves Level and Real GNP. Granger causality test

  7. FR = W1 (p-p*)+W2(y*) In which FR denotes the percentages of foreign reserves deviation from its predicted trend, W1and W2 represent the different weights that the Chinese central bank puts on inflation and GNP gaps from their trends. The New Taylor version for China

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