Chapter 19, Problem 1DAP

To determine

The results obtained from FRED database of the following:

1. Number of quarterly violations of price stability and employment mandate from 2000 to 2017.
2. Violation of price stability and employment mandate in 2017.
3. Challenges faced by monetary policy makers in achieving natural rate of unemployment and inflation below 2%.

Explanation of Solution

Based on the ad hoc test and data collected from FRED;

1. Fed’s mandate states that the average inflation gap i.e. the price stability for any two or more consecutive quarters should not be more than 0.5 in absolute value and the unemployment gap should not be larger than 1.0 for two or more consecutive quarters. Any rate larger than that was mandated by Fed should be treated as violated. In last quarter of October 2008 and first quarter of January 2009, the unemployment rate was more than 1.0. Similarly, price stability was higher than 0.5 - four times during the period 2000 to 2017 in the year 2002, 2003, 2004 and 2005.
2. Currently, the Fed has not violated its mandate in price stability and unemployment gap.
3. To assess the maximum-employment level that can be sustained, the Fed considers a broad range of labor market indicators, including how many workers are unemployed, underemployed, or discouraged and have stopped looking for a job. The Fed also looks at how hard or easy it is for people to find jobs and for employers to find qualified workers. The Fed does not specify a fixed goal for employment because the maximum level of employment is largely determined by non-monetary factors that affect the structure and dynamics of the labor market; these factors may change over time and may not be directly measurable. However, Fed policymakers release their estimates of the unemployment rate that they expect will prevail once the economy has recovered from past shocks and if it is not hit by new shocks. Another monetary policy tool deployed in response to the financial crisis was large-scale asset purchases. The Fed put additional downward pressure on longer-term interest rates. Moreover, as the Fed purchased these securities, private investors looked for other investment opportunities, and, in doing so, they pushed down other long-term interest rates, such as those on corporate bonds, and pushed up asset valuations, including equity prices. These market reactions to the large-scale asset purchases helped ease overall financial market conditions and thus supported growth in economic activity, job creation, and a return of inflation towards 2 percent.

Frequency: Quarterly
Observation_date	PCECTPI	GAP	AVERAGE GAP	UNRATE	GAP
2000-01-01	2.5	0.6	0.8	4.0	0.0
2000-04-01	2.4	-0.1		3.9	-0.1
2000-07-01	2.5	2.6		4.0	-0.1
2000-10-01	2.5	0.0		3.9	-0.1
2001-01-01	2.3	-0.2	0.3	4.2	0.3
2001-04-01	2.3	2.5		4.4	0.4
2001-07-01	1.8	-0.6		4.8	0.4
2001-10-01	1.3	-0.5		5.5	0.7
2002-01-01	0.8	1.3	0.9	5.7	0.1
2002-04-01	1.1	0.3		5.8	0.1
2002-07-01	1.5	0.4		5.7	-0.1
2002-10-01	1.9	1.5		5.9	0.0
2003-01-01	2.5	0.5	0.6	5.9	0.0
2003-04-01	1.8	-0.7		6.1	0.3
2003-07-01	1.9	2.6		6.1	-0.3
2003-10-01	1.8	-0.1		5.8	-0.3
2004-01-01	1.9	0.1	0.7	5.7	-0.1
2004-04-01	2.5	2.4		5.6	-0.2
2004-07-01	2.5	0.0		5.4	-0.2
2004-10-01	2.9	0.4		5.4	0.0
2005-01-01	2.6	2.2	1.3	5.3	-0.2
2005-04-01	2.6	0.0		5.1	-0.2
2005-07-01	3.1	0.5		5.0	-0.1
2005-10-01	3.1	2.6		5.0	-0.2
2006-01-01	3.0	-0.1	0.4	4.7	-0.2
2006-04-01	3.1	0.1		4.6	-0.1
2006-07-01	2.8	2.6		4.6	-0.2
2006-10-01	1.8	-1.0		4.4	-0.2
2007-01-01	2.3	0.5	0.8	4.5	0.1
2007-04-01	2.3	1.8		4.5	0.2
2007-07-01	2.1	-0.2		4.7	0.2
2007-10-01	3.3	1.2		4.8	0.1
2008-01-01	3.3	2.1	0.9	5.0	0.3
2008-04-01	3.5	0.3		5.3	0.3
2008-07-01	4.0	0.5		6.0	0.7
2008-10-01	1.5	1.0		6.9	1.4
2009-01-01	0.0	-1.4	-0.1	8.3	1.4
2009-04-01	-0.5	-0.6		9.3	1.0
2009-07-01	-0.9	-0.3		9.6	0.3
2009-10-01	1.2	2.1		9.9	0.3
2010-01-01	2.1	0.9	0.3	9.8	-0.1
2010-04-01	1.8	0.9		9.6	-0.2
2010-07-01	1.4	-0.3		9.5	-0.2
2010-10-01	1.3	-0.2		9.5	0.0
2011-01-01	1.7	1.8	1.4	9.0	0.0
2011-04-01	2.6	0.9		9.1	0.0
2011-07-01	2.9	0.2		9.0	-0.1
2011-10-01	2.7	2.4		8.6	-0.4
2012-01-01	2.5	-0.2	0.4	8.3	-0.4
2012-04-01	1.8	-0.7		8.2	-0.1
2012-07-01	1.6	2.3		8.0	-0.2
2012-10-01	1.8	0.2		7.8	-0.2
2013-01-01	1.5	-0.2	0.3	7.7	-0.1
2013-04-01	1.3	1.5		7.5	-0.3
2013-07-01	1.3	0.0		7.2	-0.3
2013-10-01	1.2	-0.1		6.9	-0.3
2014-01-01	1.4	1.5	0.8	6.7	-0.4
2014-04-01	1.8	0.4		6.2	-0.4
2014-07-01	1.7	-0.1		6.1	-0.1
2014-10-01	1.2	1.3		5.7	-0.1
2015-01-01	0.3	-0.9	-0.1	5.6	-0.1
2015-04-01	0.3	0.0		5.4	-0.2
2015-07-01	0.3	0.3		5.1	-0.1
2015-10-01	0.4	0.1		5.0	-0.1
2016-01-01	1.0	0.6	0.4	4.9	-0.1
2016-04-01	1.0	0.5		4.9	0.1
2016-07-01	1.2	0.1		4.9	0.1
2016-10-01	1.6	0.5		4.7	-0.2
2017-01-01	2.0	1.6	0.7	4.7	-0.3
2017-04-01	1.6	-0.5		4.3	-0.3
2017-07-01	1.5	-0.1		4.3	0.0
2017-10-01	1.7	1.7		4.1	0.0
2018-01-01	1.8	0.1		4.1	0.0

Economics Concept Introduction

Introduction:

The Federal Reserve Economic Data (FRED), is an online database consisting of hundreds of thousands of economic data time series from scores of national, international, public and private sources.