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### Econ 240 C

Lecture 12

The Big Picture

- Exploring alternative perspectives
- Exploratory Data Analysis
- Looking at components

- Trend analysis
- Forecasting long term

- Distributed lags
- Forecasting short term

CA Budget Crisis

- What is Happening to UC?
- UC Budget from the state General Fund

UC Budget

- Econ 240A Lab Four
- New data for Fiscal Year 2007-08
- Governor’s Budget Summary 2007-08
- released January 2007
- http://www.dof.ca.gov/

CA Budget Crisis

- What is happening to the CA economy?
- CA personal income

CA Budget Crisis

- How is UC faring relative to the CA economy?

CA Budget Crisis

- What is happening to CA state Government?
- General Fund Expenditures?

CA Budget Crisis

- How is CA state government General Fund expenditure faring relative to the CA economy?

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

What has happened to UC’s Share of CA General Fund Expenditures?

- UC Budget Share = (UC Budget/CA Gen Fnd Exp)

07-08 Expenditures?

UC Budget Crisis Expenditures?

- 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.

What 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)

07-08 Expenditure Relative to Personal Income?

California Political History Expenditure Relative to Personal Income?

- 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

CA Budget Crisis Expenditure Relative to Personal Income?

- Estimate of the relative size of the CA government: 7.00 %
- Estimate of UC’s Budget Share: 3.00%
- UC Bud = 0.03*0.07*CAPY
- UC Bud = 0.0021* 1502.5 $B
- UC Bud = 3.155 $B

Forecasts of UC Budget, 07-08 Expenditure Relative to Personal Income?

Econometric Estimates of UCBUD Expenditure Relative to Personal Income?

- Linear trend
- Exponential trend
- Linear dependence on CAPY
- Constant elasticity of CAPY

Econometric Estimates Expenditure Relative to Personal Income?

- Linear Trend Estimate
- UCBUDB(t) = a + b*t +e(t)
- A lucky coincidence
- Usually either too low or too high!

A Lucky Coincidence: 2 out of 10 Expenditure Relative to Personal Income?

Econometric Estimates Expenditure Relative to Personal Income?

- Logarithmic (exponential trend)
- lnUCBUDB = a + b*t +e(t)
- simple exponential trend will over-estimate UC Budget by far

Econometric Estimate Expenditure Relative to Personal Income?

- 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 2007-08

Econometric Estimates Expenditure Relative to Personal Income?

- How about a log-log relationship
- lnUCBUDB(t) = a + b*lnCAPY(t) + e(t)
- Estimated elasticity 0.833
- autocorrelated residual
- fitted lnUCBUDB(2007-08) = 1.32945
- $3.78 B

- actual (Governor’s Proposal) = 1.18481
- $3.27B

Is Higher Education an Inferior Good? Expenditure Relative to Personal Income?

Is Government an Inferior Good? Expenditure Relative to Personal Income?

- Elasticity = 1.073

Forecasting Conclusions Expenditure Relative to Personal Income?

- Trend analysis and bi-variate regressions of UC General Fund Expenditures on California Personal Income focus on the long run
- The UC budget depends on the business cycle, a more short run focus
- Try Box-Jenkins Methods

Econometric Estimates Expenditure Relative to Personal Income?

- 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

Box-Jenkins Distributed Lag Expenditure Relative to Personal Income?

- Dlnucbud = h0*dlncapy(t) + h1*dlncapy(t-1) + … + e(t)
- Dlnucbud(t) = h(z) dlncapy(t) + e(t)
- Dlncapy = 0.709*dlncapy(t-1) + resdlncapy(t)
- [1-0.709z]dlnucbud = h(z)[1-0.709z] *dlncapy(t) + [1-0.709z]*e(t)
- W(t) = h(z) resdlncapy(t) + e*(t)

Identify dlncapy: trace Expenditure Relative to Personal Income?

Estimate ARONE Model dlncapy Expenditure Relative to Personal Income?

Validate model Expenditure Relative to Personal Income?

Orthogonal Residuals Expenditure Relative to Personal Income?

Normal Residuals Expenditure Relative to Personal Income?

Cross-Correlate w and resdlncapy Expenditure Relative to Personal Income?

Distributed lag of w on resdlncapy Expenditure Relative to Personal Income?

- W =h0*resdlncapy + h1*resdlncapy(-1) + e*(t)

Distributed lag Model Expenditure Relative to Personal Income?

Residuals Expenditure Relative to Personal Income?

Also model error as arone Expenditure Relative to Personal Income?

residuals Expenditure Relative to Personal Income?

Estimate this model for dlnucbud Expenditure Relative to Personal Income?

Estimated model Expenditure Relative to Personal Income?

Diagnostics Expenditure Relative to Personal Income?

Residuals Expenditure Relative to Personal Income?

Fitted dlnucbud Expenditure Relative to Personal Income?

Dlnucbud (07-08) = 0.046

Dlnucbudf(07-08) Expenditure Relative to Personal Income?

Dlnucbudf(07-08) = 0.0452

Forecasts of UC Budget, 07-08 Expenditure Relative to Personal Income?

Identify dlnucbud Expenditure Relative to Personal Income?

Model dlnucbud Expenditure Relative to Personal Income?

Estimate model for dlnucbud Expenditure Relative to Personal Income?

Identify dlncapy

diagnostics Expenditure Relative to Personal Income?

residuals Expenditure Relative to Personal Income?

Univariate forecast dlnucbud(07-08) Expenditure Relative to Personal Income?

Dlnucbud(07-08) = 0.0696

Forecasts of UC Budget, 07-08 Expenditure Relative to Personal Income?

Efforts from earlier years Expenditure Relative to Personal Income?

Estimate ARONE Model for dlncapy Expenditure Relative to Personal Income?

Satisfactory Model Expenditure Relative to Personal Income?

Estimate ARONE Model for dlncapy(t) Expenditure Relative to Personal Income?

- 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)

Distributed Lag Model Expenditure Relative to Personal Income?

- Having saved resid as res[N(t)] from ARONE model for dlncapy
- and having correspondingly transformed dlnucbud to w
- cross-correlate w and res

Distributed lag model Expenditure Relative to Personal Income?

- There is contemporary correlation and maybe something at lag one
- specify dlnucbud(t) = h0 *dlncapy(t) + h1 *dlncapy(t-1) + resid(t)

Try an AR(6) AR(8)residual for dlnucbudb Expenditure Relative to Personal Income?

- 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

05-06 once and for all decline in UCBudget mentioned by Granfield

92-93

Distributed lag Model once and for all decline in UCBudget mentioned by Granfield

- 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)

Distributed Lag Model once and for all decline in UCBudget mentioned by Granfield

- dlnucbud(t) = h0 *dlncapy(t-1) + dummy (1992-93) + resid(t)

Fitted fractional change in UC Budget is 0.032 (3.2%)versus once and for all decline in UCBudget mentioned by Granfield

Governor’s proposal of 0.033 (3.3%)

Conclusions once and for all decline in UCBudget mentioned by Granfield

- 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

Try estimating the model in levels once and for all decline in UCBudget mentioned by Granfield

07-08 once and for all decline in UCBudget mentioned by Granfield

Postscript 2006-07 once and for all decline in UCBudget mentioned by Granfield

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