Graphics for Macroeconomics

Principles Graphing is done best when it clearly communicates ideas about data Focus on the main point while preventing distractions

Volatility Volatility makes it hard to see trends –Example from coin data

Scatter plots Scatter plots help you see the relationship between variables Time series plots vs. scatter plots

Time-series plot

Scatter Plot

Time-series plots on same scale

Scatter plot

Elements of Graphical Style Know your audience & know your goals Show the data and appeal to the viewer –Minimize non-data ink –Avoid chart junk Revise and edit, again and again

Non-data ink Note that after 1990, the pattern of velocity and opportunity cost changed significantly, with a couple of years of transition and a new pattern to the slope. The new intercept was much higher than the old one and thus the relationship changed so that it was much more difficult to use the model for forecasting.

Chartjunk

Don’t use 3 dimensions for a 2- dimensional object Don’t add decorations, cartoons, etc. that do not tell your story Hi, I’m irrelevant!

Make graphs tell your story The golden ratio of height to width is Use scale to show variations in a variable

Velocity is very stable

Or is it unstable?

Use colors to split data

Beware of Outliers Measurement outliers –Data errors Innovation outliers –A shock or innovation

Adding recession bars See instruction sheet; useful to keep around

Graphs as diagnostics for regressions Plot actual and fitted values; residuals over time Plot residuals squared or absolute values of residuals over time (solutions: interactive data analysis) Do a scatter plot of residual vs. explanatory variable

Example: consumption & income We can save residuals and do plots of residuals themselves, actual & predicted, residuals vs. explanatory variables Later, using saved residuals, we can plot squares and absolute values Note that non-random residuals suggests that a non-linear model may be better

Plotting from FRED FRED graphs are nice

Plotting from FRED Sometimes you need to make your own graphs Download FRED data to make graph What’s wrong with this graph?

Critique this graph No title Bad dates Trailing zeroes on y axis Legend takes up too much space

Time-Series Graphs Choose a scale to make the graph informative –Especially levels vs. growth rates –Which is best depends on purpose Sometimes best to show level for long-term issues Other times best to show growth rate for cyclical issues

Nominal or Real? Nominal variables of economic activity should never be plotted –You don’t know what is real activity and what is caused by higher prices –Only plot nominal variables for which it makes sense to do so: money supply, price level –Example: plot real GDP, not nominal GDP –Example: plot ratios of nominal variables, such as government debt/GDP