Problem 2: Durables, Nondurables, and the Business Cycle [25 marks]
In this problem you will analyse the behaviour of durable and non-durable consumption along the business cycle for the Australian economy.
0. Download the Excel file problem2_data.xls from Blackboard. This file contains annual data between 1965-2017 on Real GDP (chain volume measures) and Consumption (chain volume measures) across different categories (food, clothing, health, etc.) for Australia. The data was drawn from ABS.
1. CreateanewtimeseriescorrespondingtoDurableConsumption. Todoso,addupthevalues in the columns labeled “Clothing and footwear”, “Furnishings and household equipment”, and “Purchase of vehicles” for each year.
2. Create a new time series for Non-Durable Consumption by subtracting the variable created in part 2 from the variable labeled “TOTAL HOUSEHOLD FINAL CONSUMPTION EXPENDITURE” for each year.
In the rest of the problem, you will study the comovement between GDP, and Durable and Non-Durable Consumption along the business cycle.
3. ConstructtheHodrick-Prescott(HP)trendforRealGDP,DurableConsumption, andNonDurable Consumption. Choose the value for the smoothing parameter in accordance with the frequency of the data.
4. Compute the cyclical components of each of the time series from Part 3. Plot those along with the cyclical component of Real GDP using a single diagram.
5. Complete the following table (use three decimal places):
Std. Deviation Std. Deviation wrt GDP Correlation with GDP
Durable Consumption
Non-Durable Consumption
Hint: If using Excel, compute standard deviations and correlations by applying the formula STDEV.P and CORREL, respectively.
6. In class we saw that Total Consumption is pro-cyclical and less volatile than GDP. Does such a business cycle regularity apply to Durable and Non-Durable Consumption alike? Provide a brief interpretation.

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