Go to the St. Louis Federal Reserve FRED database, and find data on Real Private Domestic Investment (GPDIC1); a measure of the real interest rate, the 10-year Treasury Inflation-Indexed Security, TIIS (FII10); and a measure of financial frictions, the St. Louis Fed Financial Stress Index (STLFSI). For (FII10) and (STLFSI), convert the frequency setting to “quarterly” and download the data into a spreadsheet. For each quarter, add the (FII10) and (STLFSI) series to create r_i, the real interest rate for investments for that quarter. Then, calculate the change in both investment and r_i as the change in each variable from the previous quarter.

a) For the four most recent quarters available, calculate the average change in investment.

b) Assume that there is a one-quarter lag between movements in r_i and changes in investment; in other words, if r_i changes in the current quarter, it will affect investment in the next quarter.

For the most recent quarters available, calculate the one-quarter lagged average change in r_i.

c) Take the ratio of your answer from part (a) divided by your answer from part (b). What does this value represent? Briefly explain.

d) Repeat parts (a) through (c) for the period 2008:Q3 to 2009:Q2. How do financial frictions help explain the behavior of investment during the financial crisis? How does the coefficient on investment compare between the current period and the financial crisis period? Briefly explain.