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Econ 240 C

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  1. Econ 240 C Lecture 12

  2. The Big Picture • Exploring alternative perspectives • Exploratory Data Analysis • Looking at components • Trend analysis • Forecasting long term • Distributed lags • Forecasting short term

  3. Schedule 6

  4. Schedule 9

  5. The story based on a bivariate distributed lag model 07-08

  6. 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 2007-08 • Governor’s Budget Summary 2007-08 • released January 2007 • http://www.dof.ca.gov/

  10. CA Budget Crisis • What is happening to the CA economy? • CA personal income

  11. Log Scale

  12. CA Budget Crisis • How is UC faring relative to the CA economy?

  13. CA Budget Crisis • What is happening to CA state Government? • General Fund Expenditures?

  14. CA Budget Crisis • How is CA state government General Fund expenditure faring relative to the CA economy?

  15. 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

  16. What has happened to UC’s Share of CA General Fund Expenditures? • UC Budget Share = (UC Budget/CA Gen Fnd Exp)

  17. 07-08

  18. 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.

  19. 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)

  20. 07-08

  21. 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

  22. CA Budget Crisis • 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

  23. Forecasts of UC Budget, 07-08

  24. Econometric Estimates of UCBUD • Linear trend • Exponential trend • Linear dependence on CAPY • Constant elasticity of CAPY

  25. Econometric Estimates • Linear Trend Estimate • UCBUDB(t) = a + b*t +e(t) • A lucky coincidence • Usually either too low or too high!

  26. A Lucky Coincidence: 2 out of 10

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

  28. 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 2007-08

  29. Econometric Estimates • 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

  30. Is Higher Education an Inferior Good?

  31. Is Government an Inferior Good? • Elasticity = 1.073

  32. Forecasting Conclusions • 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