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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. Schedule 6. Schedule 9. The story based on a bivariate distributed lag model. 07-08.

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Econ 240 c

Econ 240 C

Lecture 12


The big picture
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
CA Budget Crisis

  • What is Happening to UC?

    • UC Budget from the state General Fund


Uc budget
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 crisis1
CA Budget Crisis

  • What is happening to the CA economy?

    • CA personal income



Ca budget crisis2
CA Budget Crisis

  • How is UC faring relative to the CA economy?


Ca budget crisis3
CA Budget Crisis

  • What is happening to CA state Government?

    • General Fund Expenditures?


Ca budget crisis4
CA Budget Crisis

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


Long run pattern analysis
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
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
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
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
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 crisis5
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
Forecasts of UC Budget, 07-08 Expenditure Relative to Personal Income?


Econometric estimates of ucbud
Econometric Estimates of UCBUD Expenditure Relative to Personal Income?

  • Linear trend

  • Exponential trend

  • Linear dependence on CAPY

  • Constant elasticity of CAPY


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


Econometric estimates1
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
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 estimates2
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
Is Higher Education an Inferior Good? Expenditure Relative to Personal Income?


Is government an inferior good
Is Government an Inferior Good? Expenditure Relative to Personal Income?

  • Elasticity = 1.073


Forecasting conclusions
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 estimates3
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
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
Identify dlncapy: trace Expenditure Relative to Personal Income?


Estimate arone model dlncapy
Estimate ARONE Model dlncapy Expenditure Relative to Personal Income?


Validate model
Validate model Expenditure Relative to Personal Income?


Orthogonal residuals
Orthogonal Residuals Expenditure Relative to Personal Income?


Normal residuals
Normal Residuals Expenditure Relative to Personal Income?


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


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

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


Distributed lag model
Distributed lag Model Expenditure Relative to Personal Income?


Residuals
Residuals Expenditure Relative to Personal Income?


Also model error as arone
Also model error as arone Expenditure Relative to Personal Income?


Residuals1
residuals Expenditure Relative to Personal Income?


Estimate this model for dlnucbud
Estimate this model for dlnucbud Expenditure Relative to Personal Income?


Estimated model
Estimated model Expenditure Relative to Personal Income?


Diagnostics
Diagnostics Expenditure Relative to Personal Income?


Residuals2
Residuals Expenditure Relative to Personal Income?


Fitted dlnucbud
Fitted dlnucbud Expenditure Relative to Personal Income?

Dlnucbud (07-08) = 0.046


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

Dlnucbudf(07-08) = 0.0452


Forecasts of uc budget 07 081
Forecasts of UC Budget, 07-08 Expenditure Relative to Personal Income?


Identify dlnucbud
Identify dlnucbud Expenditure Relative to Personal Income?


Model dlnucbud
Model dlnucbud Expenditure Relative to Personal Income?


Estimate model for dlnucbud
Estimate model for dlnucbud Expenditure Relative to Personal Income?

Identify dlncapy


Diagnostics1
diagnostics Expenditure Relative to Personal Income?


Residuals3
residuals Expenditure Relative to Personal Income?


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

Dlnucbud(07-08) = 0.0696


Forecasts of uc budget 07 082
Forecasts of UC Budget, 07-08 Expenditure Relative to Personal Income?


Efforts from earlier years
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
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 model1
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 model2
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
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 model3
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 model4
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
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
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
Postscript 2006-07 once and for all decline in UCBudget mentioned by Granfield


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