The file gfc.rda contains data about economic activity in two major economies: The United States and the Euro Area (the group of countries in Europe where the Euro currency is used). Specifically, the data are the logs of their Gross Domestic Product (GDP), standardized so that the value of GDP is equal to 100 in 2000. The sample period is from 1995Q1 to 2009Q4 and includes the global financial crisis that began in September 2007. a) Obtain two graphs for the levels and the changes in the economic activity. [Hint: The figures should show values for both US and Euro Area economies] b) Based on a visual inspection of the data, what would you infer about the interactions between the GDPs in the two economies? c) Do the economies have a long-run relationship? [Hint: Apply unit root tests and cointegration tests where necessary] d) Specify and estimate the econometric model for the long-run relationship. Plot the residuals and comment on their properties. [Hint: Find cointegration equation, VEC and/or VAR models where necessary] e) Do the economies have a short-run relationship? Is there a causal relation between the GDP of the two economies in the short-run?

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