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576 Chapter 14 Introduction to Time Series Regression and Forecasting

Figure 14.2 Four Economic Time Series

Percent Dollars per pound
11 3.0
10
9 2.5
8
7 2.0
6
5 1.5
4
3 1.0
1960 1970 1980 1990 2000 2010 2012
0.5
(a) U.S. Unemployment Rate
0.0
Logarithm 1960 1970 1980 1990 2000 2010 2012
5.0 (b) U.S. Dollar/British Pound Exchange Rate

4.5 Percent per day
12.5
4.0 10.0
7.5
3.5 5.0
2.5
3.0 0.0
–2.5
2.5 –5.0
1960 1970 1980 1990 2000 2010 2012 –7.5
(c) Logarithm of Index of Industrial Production –10.0
in Japan 1990 1994 1998 2002 2006 2010

(d) Percentage Change in Daily Values of the Wilshire
5000 Stock Price Index

The four time series have markedly different patterns. The unemployment rate (Figure 14.2a) increases during
recessions and declines during recoveries and expansions. The exchange rate between the U.S. dollar and the
British pound (Figure 14.2b) shows a discrete change after the 1972 collapse of the Bretton Woods system of
fixed exchange rates. The logarithm of the index of industrial production in Japan (Figure 14.2c) shows a pat-
tern of decreasing growth. The daily percentage changes in the Wilshire 5000 stock price index (Figure 14.2d) are
essentially unpredictable, but the variance changes: This series shows “volatility clustering.”

The dollar/pound exchange rate (Figure 14.2b) is the price of a British pound
(£) in U.S. dollars. Before 1972, the developed economies ran a system of fixed
exchange rates—called the “Bretton Woods” system—under which governments
worked to keep exchange rates from fluctuating. In 1972, inflationary pressures
led to the breakdown of this system; thereafter, the major currencies were allowed
to “float”; that is, their values were determined by the supply and demand for
currencies in the market for foreign exchange. Prior to 1972, the exchange rate