Economics and Statistics

Hello I'm finally back from my extended break. I thought that we should start studying Econometrics.  Let's begin by analyzing a simple bivariate regression. Assume that this equation describes the relationship between two variables X and Y. We say that Y is the dependent variable, whereas X is the independent variable. In other words, we assume that Y (the output) depends on X (the input). Epsilon is the error term, it represents other factors that affect Y. The error term must be uncorrelated with the variable X so that we do not need to include them in our regression, and thus the coefficient of X (beta) should not change, even though Epsilon also determines Y.  beta-0 is the constant term. It tells us what would be Y if X=0. beta-1 is the effect on Y if X changes by one unit. To see this, assume X=education is a continuous function, let's take the derivative of Y=wage with respect to X: Thus, if education goes up by one unit, we should expect, on average, wage to go up

Hello all, it's been quite some time since I have made any major announcements since the creation of this blog about a year and a half ago. I am currently in graduate school and will soon take a portion of my comprehensive examination (i.e exams in Micro, Macro, and Metrics that will allow me to continue my studies in my graduate program), wish me luck! Thus, I will not be able to post consistently until at least mid-June. The roadmap is as such, if I pass, I will start introductory lessons in Econometrics and Statistics (if not, then I'll have to study until I can retake the comps in August). I hope that once I am done, I will be able to add more advance materials to the blog, such as general equilibrium, indirect utility functions, and game theory/mechanism design for Micro. The Solow, Ramsey, RBC, New Keynesian models, permanent income hypothesis (PIH) and more for Macro. By the way I think I still need to add notes on the IS-LM curves, so I will do that before jumping to th

Assume that the U.S government wants to start fixing its currency against the Mexican peso.   Government officials estimate that the optimal exchange rate should be at one peso for $0.35.  You are given the following information about the U.S market for Mexican peso: Find how much peso does the U.S needs to buy or sell in order to achieve its targeted exchange rate. Find the original equilibrium exchange rate: let the demand equal to the supply curve. Just like in the previous exercise, we see that one peso is worth half a U.S dollar and there are 6,250,000 pesos demanded at this price. Now, in order to change the exchange rate, realize that the U.S government has access to U.S dollars (for the sake of the argument, assume the central bank is no longer independent). Then, it can only shift the demand for Mexican pesos in the U.S foreign exchange market. Thus, there must only be a movement along the supply curve, set $=0.35 in the supply schedule and solve for p. Now, calculate the gap

Floating exchange rate:  the equilibrium exchange rate and quantity determined by the foreign exchange market. Anything that shifts the demand or supply curve will change the equilibrium exchange rate. Determinants of demand and supply for a currency: Change in taste and preferences: say Chinese consumers start to prefer American made cars. We should expect the demand for US dollars to go up (in the market for dollars in China) and the supply for the Chinese Yuan to go up as well (in the market for Yuan in the U.S). This will lead to an appreciation of the U.S dollars and a depreciation of the Chinese Yuan. Relative income level: consumers will be more likely to consume goods from countries with lower inflation rates. Relative interest rate: the higher the interest rate (relative to another country), the higher the demand for a country's currency, as investors are interested in this opportunity.  Speculation: expectation about a country's exchange rate among investors. For exam

  You are given the following demand and supply schedules for the U.S foreign exchange market for Mexican pesos: Identify the equilibrium exchange rate and quantity, and draw the demand and supply curves. Then, what would happen to the value of the pesos if the demand for American goods increases? What should we expect to happen to the U.S current account? Assuming the trade balance is by far the biggest variable and the U.S 's current account was equal to 0 before this sudden increase. The equilibrium must be the point that is shared by both the demand and supply schedules. Thus, one pesos is worth about 0.5 U.S dollars (the exchange rate) and there are 6,250,000 pesos supplied at this point, assuming that one p is worth 10 million pesos. Let's graph the demand and supply curves: If the consumers in Mexico want to consume more American goods, then we should expect the supply curve for pesos to shift to the right. This will cause an appreciation of the dollar and depreciation o

A currency exchange rate tells us about the value of a currency relative to another currency.  We say that a currency appreciates when its relative value goes up. We say that a currency depreciates when its relative value decreases. In a market that relates two currencies, if one appreciates, it must be the case that the other currency depreciates.  Demand in the foreign exchange market: it represents the quantity of a currency demanded by agents who are holding other currencies. The agents want to buy goods, services, or financial assets from a country whose currency is demanded. The demand must be downward slopping. The weaker the currency, the more attractive the goods produced in that country are, and foreign consumers need to hold more of that currency in order to buy the products. Thus, a change in the exchange rate leads to a movement along the demand curve. Supply in the foreign exchange market: it represents the willingness of people in the country supply to foreigners their d