PCE: Personal consumptions expenditures is the primary measure of consumer spending on goods and services in the US economy. This accounts for 2/3 of domestic spending and this is the primary engine that drives future economic growth https://www.bea.gov/resources/methodologies/nipa-handbook/pdf/chapter-05.pdf
AHE: Average hourly earnings is reported in dollars per hour and is reported monthly
PCEPI Personal consumptions expenditures price index is a measure of the average increase in prices for all domestic personal consumption. A major inflationary measure in the United States
Part 1 – 20 pts Exploratory Data Analysis
- 10 pts Perform quantitative and qualitative EDA
- 10 pts Give a summary of your findings
Part 2 – 40 pts Granger Causality
- 8 pts Consider PCE and AHE, give an intuitive description of the relationship between the two economic measures. This is your opinion, looking for logic and understanding not right or wrong
- 8 pts Difference the two variables
- 8 pts Check Granger Causality for the direction you stated in 2A, return plot of results
- 8 pts Check Granger Causality for the opposite direction you stated in 2A, return plot of results
- 8 pts Summarize your findings. You must understand the underlying null hypothesis of test.
Part 3 – 40 pts VARMA modeling
- 8 pts Using differenced data, run a search to find the best fit order for AH, PCE, and PCEIP, return a plot
- 8 pts Fit the VAR model with chosen order, return the model summary.
- 8 pts Explain the values in the correlation matrix of residuals. What are the implications for the model fit?
- 8 pts Create 12 periods of forecast for all three variables, return plots of predicted values against actual values, Return variable level RMSE (3 total)
8 pts What is the advantage of this VAR model? What would ARIMA or prophet models on this dataset look like, if we were asked to forecast AHE?
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