Econ 240 C
Lecture 12
The Big Picture


Exploring alternative perspectives
Exploratory Data Analysis
• Looking at components

Trend analysis
• Forecasting long term

Distributed lags
• Forecasting short term
2
3
4
5
The story based on a bivariate distributed lag model
6
Forecast of UC Budget ,2006-07 & 2007-08, Nominal Billions
4
3.5
07-08
UC Budget
3
2.5
2
1.5
1
0.5
0
0
200
400
600
800
CA Personal Income
1000
1200
1400
1600
19
68
-6
19 9
70
-7
19 1
72
-7
19 3
74
-7
19 5
76
-7
19 7
78
-7
19 9
80
-8
19 1
82
-8
3
19
84
-8
19 5
86
-8
19 7
88
-8
19 9
90
-9
19 1
92
-9
19 3
94
-9
19 5
96
-9
19 7
98
-9
20 9
00
-0
20 1
02
-0
3
20
04
-0
20 5
06
-0
7
Billions $
Another Story Based On a Univariate ARIMA Model
7
fORECAST OF UC Budget, 06-07 & 07-08, Nominal Billions
4
3.5
3
2.5
2
1.5
1
0.5
0
Fiscal Year
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/
19
68
-6
9
19
70
-7
1
19
72
-7
3
19
74
-7
5
19
76
-7
7
19
78
-7
9
19
80
-8
1
19
82
-8
3
19
84
-8
5
19
86
-8
7
19
88
-8
9
19
90
-9
1
19
92
-9
3
19
94
-9
5
19
96
-9
7
19
98
-9
9
20
00
-0
1
20
02
-0
3
20
04
-0
5
Millions $
11
UC Budget in Millions of Nominal $
4000
3500
3000
2500
2000
1500
1000
500
0
Fiscal Year
Logarithm of UC Budget: Changes in Growth Paths
1.5
1
lnucbudb
0.5
0
69 -71 -73 -75 -77 -79 -81 -83 -85 -87 -89 -91 -93 -95 -97 -99 -01 -03 -05
68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
-0.5
-1
Fitted through 91-92
lnucbudb
-1.5
Fiscal Year
13
CA Budget Crisis

What is happening to the CA economy?
• CA personal income
19
68
-6
9
19
70
-7
1
19
72
-7
3
19
74
-7
5
19
76
-7
7
19
78
-7
9
19
80
-8
1
19
82
-8
3
19
84
-8
5
19
86
-8
7
19
88
-8
9
19
90
-9
1
19
92
-9
3
19
94
-9
5
19
96
-9
7
19
98
-9
9
20
00
-0
1
20
02
-0
3
20
04
-0
5
Billions $
14
California Personal Income in Billions of Nominal $
1400
1200
1000
800
600
400
200
0
Fiscal Year
19
68
-6
9
19
70
-7
1
19
72
-7
3
19
74
-7
5
19
76
-7
7
19
78
-7
9
19
80
-8
1
19
82
-8
3
19
84
-8
5
19
86
-8
7
19
88
-8
9
19
90
-9
1
19
92
-9
3
19
94
-9
5
19
96
-9
7
19
98
-9
9
20
00
-0
1
20
02
-0
3
20
04
-0
5
Billions $
15
California Personal Income in Billions of Nominal $
10000
1000
100
10
Fiscal Year
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
4
3.5
UC Budget B $
3
2.5
2
1.5
1
0.5
0
0
200
400
600
800
CAPY B$
1000
1200
1400
19
CA Budget Crisis

What is happening to CA state
Government?
• General Fund Expenditures?
19
68
-6
9
19
70
-7
1
19
72
-7
3
19
74
-7
5
19
76
-7
7
19
78
-7
9
19
80
-8
1
19
82
-8
3
19
84
-8
5
19
86
-8
7
19
88
-8
9
19
90
-9
1
19
92
-9
3
19
94
-9
5
19
96
-9
7
19
98
-9
9
20
00
-0
1
20
02
-0
3
20
04
-0
5
Millions $
20
CA State Government General Fund Expenditures Nominal Millions
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
Fiscal Year
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
100
90
Gen. Fund Ex. B Nom. $
80
70
60
50
40
30
20
10
0
0
200
400
600
800
CAPY, B Nom.$
1000
1200
1400
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
What has happened to UC’s
Share of CA General Fund
Expenditures?

24
UC Budget Share = (UC Budget/CA Gen
Fnd Exp)
19
68
-6
9
19
70
-7
1
19
72
-7
3
19
74
-7
5
19
76
-7
7
19
78
-7
9
19
80
-8
1
19
82
-8
3
19
84
-8
5
19
86
-8
7
19
88
-8
9
19
90
-9
1
19
92
-9
3
19
94
-9
5
19
96
-9
7
19
98
-9
9
20
00
-0
1
20
02
-0
3
20
04
-0
5
Percent
25
UC's Budget Share, 1968-69 through 2005-06
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Fiscal Year
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.
What has happened to the size29of
California Government
Expenditure Relative to Personal
Income?

Relative Size of CA Government = (CA
Gen Fnd Exp/CA Pers Inc)
19
68
-6
9
19
70
-7
1
19
72
-7
3
19
74
-7
5
19
76
-7
7
19
78
-7
9
19
80
-8
1
19
82
-8
3
19
84
-8
5
19
86
-8
7
19
88
-8
9
19
90
-9
1
19
92
-9
3
19
94
-9
5
19
96
-9
7
19
98
-9
9
20
00
-0
1
20
02
-0
3
20
04
-0
5
Percent
30
The Size of CA State Government Relative to the Economy
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Fiscal Year
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 $
4
3.5
Billiuons $
3
2.5
2
1.5
1
0.5
0
0
5
10
15
20
Fiscal year
25
30
35
4
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 $
4.5
4
3.5
Billiuons $
3
2.5
2
1.5
1
0.5
0
0
5
10
15
20
Fiscal year
25
30
35
40
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 200506
41
UCBudget Vs. CA Personal Income, 68-69 through 05-06
4
UC Budget Nominal Billions
3.5
3
2.5
2
1.5
1
0.5
0
0
200
400
600
800
CAPY Nominal Billions
1000
1200
1400
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
4
UC Budget Nominal Billions
3.5
3
05-06
2.5
2
1.5
92-93
1
0.5
0
0
200
400
600
800
CAPY Nominal Billions
1000
1200
1400
69
UC Budget In Billions of Nominal $
4
3.5
Billiuons $
3
2.5
2
1.5
1
0.5
0
0
5
10
15
20
Fiscal year
25
30
35
4
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
Fitted fractional change in UC Budget is 0.032 (3.2%)versus
84
Governor’s proposal of 0.033 (3.3%)
Conclusions



85
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
lnucbudb
0.5
0
69 -71 -73 -75 -77 -79 -81 -83 -85 -87 -89 -91 -93 -95 -97 -99 -01 -03 -05
68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
-0.5
-1
Fitted through 91-92
lnucbudb
-1.5
Fiscal Year
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
4
3.5
07-08
UC Budget
3
2.5
2
1.5
1
0.5
0
0
200
400
600
800
CA Personal Income
1000
1200
1400
1600
96
Postscript 2006-07
0.6
97
DUCBUDGET
0.4
0.2
0.0
-0.2
-0.4
0
20
40
60
DCAPY
80
100
120
Changes in California Personal Income and Changes in the UC Budget
98
0.6
0.4
0.2
0.0
-0.2
-0.4
70
75
80
85
90
95
00
05
95
00
05
DUCBUDGET
120
100
80
60
40
20
0
70
75
80
85
90
DCAPY
99
100
0.6
0.4
0.2
0.3
0.0
0.2
-0.2
0.1
-0.4
0.0
-0.1
-0.2
80
85
Residual
90
95
Actual
00
Fitted
05
101
102