Econ 240 C Lecture 12
Jan 20, 2016
Econ 240 C
Lecture 12
2
The Big Picture
Exploring alternative perspectives Exploratory Data Analysis
• Looking at components
Trend analysis• Forecasting long term
Distributed lags• Forecasting short term
3
4
5
6
Forecast of UC Budget ,2006-07 & 2007-08, Nominal Billions
0
0.5
1
1.5
2
2.5
3
3.5
4
0 200 400 600 800 1000 1200 1400 1600
CA Personal Income
UC
Bu
dg
et
07-08
The story based on a bivariate distributed lag model
7
fORECAST OF UC Budget, 06-07 & 07-08, Nominal Billions
0
0.5
1
1.5
2
2.5
3
3.5
4
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
2006
-07
Fiscal Year
Bil
lio
ns
$
Another Story Based On a Univariate ARIMA Model
8
Part I. CA Budget Crisis
9
CA Budget Crisis
What is Happening to UC?• UC Budget from the state General Fund
10
UC Budget
Econ 240A Lab Four New data for Fiscal Year 2005-06 Governor’s Budget Summary 2005-06
• released January 2005• http://www.dof.ca.gov/
11
UC Budget in Millions of Nominal $
0
500
1000
1500
2000
2500
3000
3500
4000
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Mil
lio
ns
$
Logarithm of UC Budget: Changes in Growth Paths
-1.5
-1
-0.5
0
0.5
1
1.5
68-6
9
70-7
1
72-7
3
74-7
5
76-7
7
78-7
9
80-8
1
82-8
3
84-8
5
86-8
7
88-8
9
90-9
1
92-9
3
94-9
5
96-9
7
98-9
9
00-0
1
02-0
3
04-0
5
Fiscal Year
lnu
cbu
db
Fitted through 91-92
lnucbudb
13
CA Budget Crisis
What is happening to the CA economy?• CA personal income
14
California Personal Income in Billions of Nominal $
0
200
400
600
800
1000
1200
1400
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Bil
lio
ns
$
15
California Personal Income in Billions of Nominal $
10
100
1000
10000
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Bil
lio
ns
$
16
17
CA Budget Crisis
How is UC faring relative to the CA economy?
18
UC Budget Vs. CA Personal Income, 68-69 through 05-06
0
0.5
1
1.5
2
2.5
3
3.5
4
0 200 400 600 800 1000 1200 1400
CAPY B$
UC
Bu
dg
et B
$
19
CA Budget Crisis
What is happening to CA state Government?• General Fund Expenditures?
20
CA State Government General Fund Expenditures Nominal Millions
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Mil
lio
ns
$
21
CA Budget Crisis
How is CA state government General Fund expenditure faring relative to the CA economy?
22
CA Size of Govt. Vs. SIze of Economy
0
10
20
30
40
50
60
70
80
90
100
0 200 400 600 800 1000 1200 1400
CAPY, B Nom.$
Gen
. F
un
d E
x. B
No
m.
$
23
Long Run Pattern Analysis
Make use of definitions: UCBudget = (UCBudget/CA Gen Fnd
Exp)*(CA Gen Fnd Exp/CA Pers Inc)* CA Pers Inc
UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc
24What has happened to UC’s Share of CA General Fund
Expenditures? UC Budget Share = (UC Budget/CA Gen
Fnd Exp)
25
UC's Budget Share, 1968-69 through 2005-06
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Per
cen
t
26
27
28
UC Budget Crisis
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.
29What has happened to the size of California Government Expenditure Relative to Personal Income? Relative Size of CA Government = (CA
Gen Fnd Exp/CA Pers Inc)
30
The Size of CA State Government Relative to the Economy
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
1968
-69
1970
-71
1972
-73
1974
-75
1976
-77
1978
-79
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
1992
-93
1994
-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
Fiscal Year
Per
cen
t
31
California Political History 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
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
Estimate of the relative size of the CA government: 6.50 %
Estimate of UC’s Budget Share: 3.25%
33
CA Budget Crisis: Pattern Estimate of UC Budget UC Budget = UC Budget Share*Relative
Size of CA Government*CA Pers Inc Political trends estimate UC Budget = 0.0325*.065*1324.1 $B =$
2.80 B estimate Governor’s proposal in January: $ 2.81 B
34
Econometric Estimates of UCBUD
Linear trend Exponential trend Linear dependence on CAPY Constant elasticity of CAPY
35
Econometric Estimates
Linear Trend Estimate UCBUDB(t) = a + b*t +e(t)
• about 3.0 B• Too optimistic
36
UC Budget In Billions of Nominal $
0
0.5
1
1.5
2
2.5
3
3.5
4
0 5 10 15 20 25 30 35 40
Fiscal year
Bil
liu
on
s $
37
Econometric Estimates
Logarithmic (exponential trend) lnUCBUDB = a + b*t +e(t) simple exponential trend will over-estimate
UC Budget by far
38
UC Budget In Billions of Nominal $
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
0 5 10 15 20 25 30 35 40
Fiscal year
Bil
liu
on
s $
39
40
Econometric Estimate
Dependence of UC Budget on CA Personal Income
UCBUDB(t) = a + b*CAPY(t) + e(t) looks like a linear dependence on income
will overestimate the UC Budget for 2005-06
41
UCBudget Vs. CA Personal Income, 68-69 through 05-06
0
0.5
1
1.5
2
2.5
3
3.5
4
0 200 400 600 800 1000 1200 1400
CAPY Nominal Billions
UC
Bu
dg
et N
om
inal
Bil
lio
ns
42
Econometric Estimates
How about a log-log relationship lnUCBUDB(t) = a + b*lnCAPY(t) + e(t) Estimated elasticity 0.847 autocorrelated residual fitted lnUCBUDB(2005-06) = 1.24886
• $3.49 B
actual (Governor’s Proposal) = 1.03816• $2.81B
43
44
45
46
47
Econometric Estimates
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)
Orthogonalize dlncapy and save residual need to do transform dlnucbudb dlnucbudb(t) = h(Z)*dlncapy(y) + resid(t) dlncapy(t) = 0.72*dlncapy(t-1) + N(t) [1 - 0.72Z]*dlnucbudb(t) = h(Z)* [1 -
0.72Z]*dlncapy(t) + [1 - 0.72Z]*resid(t) i.e. w(t) = h(Z)*N(t) + residw(t)
57
Distributed Lag Model
Having saved resid as res[N(t)] from ARONE model for dlncapy
and having correspondingly transformed dlnucbud to w
cross-correlate w and res
58
59
Distributed lag model
There is contemporary correlation and maybe something at lag one
specify dlnucbud(t) = h0 *dlncapy(t) + h1
*dlncapy(t-1) + resid(t)
60
61
62
63
Try an AR(6) AR(8)residual for dlnucbudb
64
65
66
67
Try a dummy for 1992-93, the last recession, this is the once and for all decline in UCBudget mentioned by Granfield
There is too much autocorrelation in the residual from the regression of lnucbud(t) = a + b*lncapy(t) + e(t) to see the problem
Look at the same regression in differences
68
UCBudget Vs. CA Personal Income, 68-69 through 05-06
0
0.5
1
1.5
2
2.5
3
3.5
4
0 200 400 600 800 1000 1200 1400
CAPY Nominal Billions
UC
Bu
dg
et N
om
inal
Bil
lio
ns
05-06
92-93
69
UC Budget In Billions of Nominal $
0
0.5
1
1.5
2
2.5
3
3.5
4
0 5 10 15 20 25 30 35 40
Fiscal year
Bil
liu
on
s $
70
71
72
73
74
Distributed lag Model dlnucbud(t) = h0 *dlncapy(t) + h1 *dlncapy(t-
1) + dummy (1992-93) + resid(t) dlnucbud(t) = h0 *dlncapy(t) + h1 *dlncapy(t-
1) + dummy (1992-93) + dummy(2002-03) + resid(t)
dlnucbud(t) = h0 *dlncapy(t) + dummy (1992-93) + resid(t)
75
76
77
78
79
Distributed Lag Model
dlnucbud(t) = h0 *dlncapy(t-1) + dummy (1992-93) + resid(t)
80
81
82
83
84Fitted fractional change in UC Budget is 0.032 (3.2%)versusGovernor’s proposal of 0.033 (3.3%)
85
Conclusions Governors proposed increase in UC Budget
of 3.3% is the same as expected from a Box-Jenkins model, controlling for income
The UC Budget growth path ratcheted down in the recession beginning July 1990
The UC Budget growth path looks like it ratcheted down again in the recession beginning March 2001
Logarithm of UC Budget: Changes in Growth Paths
-1.5
-1
-0.5
0
0.5
1
1.5
68-6
9
70-7
1
72-7
3
74-7
5
76-7
7
78-7
9
80-8
1
82-8
3
84-8
5
86-8
7
88-8
9
90-9
1
92-9
3
94-9
5
96-9
7
98-9
9
00-0
1
02-0
3
04-0
5
Fiscal Year
lnu
cbu
db
Fitted through 91-92
lnucbudb
87
88
Try estimating the model in levels
89
90
91
92
93
94
95
Forecast of UC Budget ,2006-07 & 2007-08, Nominal Billions
0
0.5
1
1.5
2
2.5
3
3.5
4
0 200 400 600 800 1000 1200 1400 1600
CA Personal Income
UC
Bu
dg
et
07-08
96
Postscript 2006-07
97
-0.4
-0.2
0.0
0.2
0.4
0.6
0 20 40 60 80 100 120
DCAPY
DU
CB
UD
GE
T
98
-0.4
-0.2
0.0
0.2
0.4
0.6
70 75 80 85 90 95 00 05
DUCBUDGET
0
20
40
60
80
100
120
70 75 80 85 90 95 00 05
DCAPY
Changes in California Personal Income and Changes in the UC Budget
99
100
101
-0.2
-0.1
0.0
0.1
0.2
0.3
-0.4
-0.2
0.0
0.2
0.4
0.6
80 85 90 95 00 05
Residual Actual Fitted
102