1. Go to the “Federal Reserve Economic Data” (FRED) database at https://research.stlouisfed.org/fred2/ 2. Find the three-month treasury bill: secondary market rate, and the consumer price index for all urban consumers: all items. 3. Download both at a monthly frequency from 1947-present 4. Calculate the lagged yearly net inflation rate from the CPI data in percent terms. (For period t, divide period t’s CPI by period t − 12’s CPI. This is gross inflation. Subtract the gross inflation by 1 and multiply by 100 to get the net inflation rate in percent: πt−12→t = 100 · CP It CP It−12 − 1 ) Plot and compare the net inflation rate and the three-month treasury bill together from 1948- present: what do you notice? In economics, you frequently see the “Fisher Equation”, which is i ≈ r + π, or “the nominal interest rate is (to a first-order approximation) equal to the real interest rate plus the inflation rate.” If the three-month treasury bill is i, and the inflation rate you calculated is π, does your graph give you any information about whether r or π can explain what’s going on with i? That is, when r or π moves, i moves by definition. We see a lot of variation in i on your graph. Qualitatively, how much can be attributed to π vs. r?
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