Consider the following distributed lag model relating the percentage growth in private investment (INVGWTH) to the federal funds rate of interest (FFRATE).

a. Suppose \(F F R A T E=1 \%\) for \(t=1,2,3,4\). Use the abovementioned equation to forecast \(I N V G W T H\) for \(t=4\).

b. Suppose that FFRATE is raised by one percentage point to \(2 \%\) in period \(t=5\) and then returned to its original level of \(1 \%\) for \(t=6,7,8,9\). Use the equation to forecast \(I N V G W T H\) for periods \(t=5,6,7,8,9\). Relate the changes in your forecasts to the values of the coefficients. What are the delay multipliers?

c. Suppose that FFRATE is raised to \(2 \%\) for periods \(t=5,6,7,8,9\). Use the equation to forecast INVGWTH for periods \(t=5,6,7,8,9\). Relate the changes in your forecasts to the values of the coefficients. What are the interim multipliers? What is the total multiplier?

Transcribed Image Text:

= INVGWTH, 4-0.4FFRATE, -0.6FFRATE-1-0.3FFRATE-2-0.2FFRATE+-3