Econ 240 C Lecture 12

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

3

4

5

The story based on a bivariate distributed lag model

7 Another Story Based On a Univariate ARIMA Model

8 Part I. CA Budget Crisis

9 CA Budget Crisis w What is Happening to UC? UC Budget from the state General Fund

10 UC Budget w Econ 240A Lab Four w New data for Fiscal Year w Governor’s Budget Summary released January

11

13 CA Budget Crisis w What is happening to the CA economy? CA personal income

14

15

16

17 CA Budget Crisis w How is UC faring relative to the CA economy?

18

19 CA Budget Crisis w What is happening to CA state Government? General Fund Expenditures?

20

21 CA Budget Crisis w How is CA state government General Fund expenditure faring relative to the CA economy?

22

23 Long Run Pattern Analysis w Make use of definitions: w UCBudget = (UCBudget/CA Gen Fnd Exp)*(CA Gen Fnd Exp/CA Pers Inc)* CA Pers Inc w UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc

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

25

26

27

28 UC Budget Crisis w 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.

29 What has happened to the size of California Government Expenditure Relative to Personal Income? w Relative Size of CA Government = (CA Gen Fnd Exp/CA Pers Inc)

30

31 California Political History w 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 w Gann Inititiative (Prop 4) In November 1979, the Gann initiative was passed by the voters, limits real per capita government expenditures

32 CA Budget Crisis w Estimate of the relative size of the CA government: 6.50 % w Estimate of UC’s Budget Share: 3.25%

33 CA Budget Crisis: Pattern Estimate of UC Budget w UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc w Political trends estimate w UC Budget = *.065* $B =$ 2.80 B estimate w Governor’s proposal in January: $ 2.81 B

34 Econometric Estimates of UCBUD w Linear trend w Exponential trend w Linear dependence on CAPY w Constant elasticity of CAPY

35 Econometric Estimates w Linear Trend Estimate w UCBUDB(t) = a + b*t +e(t) about 3.0 B Too optimistic

36

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

38

39

40 Econometric Estimate w Dependence of UC Budget on CA Personal Income w UCBUDB(t) = a + b*CAPY(t) + e(t) w looks like a linear dependence on income will overestimate the UC Budget for

41

42 Econometric Estimates w How about a log-log relationship w lnUCBUDB(t) = a + b*lnCAPY(t) + e(t) w Estimated elasticity w autocorrelated residual w fitted lnUCBUDB( ) = $3.49 B w actual (Governor’s Proposal) = $2.81B

43

44

45

46

47 Econometric Estimates w 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

48 Identify dlnucbud

49

50

51 Identify dlncapy

52

53

54 Estimate ARONE Model for dlncapy

55 Satisfactory Model

56 Estimate ARONE Model for dlncapy(t) w Orthogonalize dlncapy and save residual w need to do transform dlnucbudb w dlnucbudb(t) = h(Z)*dlncapy(y) + resid(t) w dlncapy(t) = 0.72*dlncapy(t-1) + N(t) w [ Z]*dlnucbudb(t) = h(Z)* [ Z]*dlncapy(t) + [ Z]*resid(t) w i.e. w(t) = h(Z)*N(t) + residw(t)

57 Distributed Lag Model w Having saved resid as res[N(t)] from ARONE model for dlncapy w and having correspondingly transformed dlnucbud to w w cross-correlate w and res

58

59 Distributed lag model w There is contemporary correlation and maybe something at lag one w specify dlnucbud(t) = h 0 *dlncapy(t) + h 1 *dlncapy(t-1) + resid(t)

60

61

62

63 Try an AR(6) AR(8)residual for dlnucbudb

64

65

66

67 w Try a dummy for , the last recession, this is the once and for all decline in UCBudget mentioned by Granfield w There is too much autocorrelation in the residual from the regression of lnucbud(t) = a + b*lncapy(t) + e(t) to see the problem w Look at the same regression in differences

69

70

71

72

73

74 Distributed lag Model w dlnucbud(t) = h 0 *dlncapy(t) + h 1 *dlncapy(t-1) + dummy ( ) + resid(t) w dlnucbud(t) = h 0 *dlncapy(t) + h 1 *dlncapy(t-1) + dummy ( ) + dummy( ) + resid(t) w dlnucbud(t) = h 0 *dlncapy(t) + dummy ( ) + resid(t)

75

76

77

78

79 Distributed Lag Model w dlnucbud(t) = h 0 *dlncapy(t-1) + dummy ( ) + resid(t)

80

81

82

83

84Fitted fractional change in UC Budget is (3.2%)versus Governor’s proposal of (3.3%)

85 Conclusions w Governors proposed increase in UC Budget of 3.3% is the same as expected from a Box-Jenkins model, controlling for income w The UC Budget growth path ratcheted down in the recession beginning July 1990 w The UC Budget growth path looks like it ratcheted down again in the recession beginning March 2001

87

88 Try estimating the model in levels

89

90

91

92

93

94

96 Postscript

97

98

99

100

101

102