Ecomet Final

The Impact of Gross Fixed Capital Formation Growth on the
Economic Growth of the Philippines: A Time Series Approach

An Empirical Paper
Presented to
The Faculty of the School of Economics
De La Salle University
In Partial Fulfillment of the Requirements in ECOMET2
Submitted by:
Ibas, Shaira Marie S.
11239190
Submitted to:
Dr. Cesar Rufino
Table of Contents
...................................................................................................................................................................... 1
INTRODUCTION ............................................................................................................................................ 5
Background of the Study............................................................................................................................... 5
Statement of the Problem ......................................................................................................................... 6
Objectives of the Study ............................................................................................................................. 6
Significance of the Study........................................................................................................................... 7
Scope and Limitations ............................................................................................................................... 7
REVIEW OF RELATED LITERATURE .............................................................................................................. 8
THEORETICAL FRAMEWORK ...................................................................................................................... 11

Neoclassical Growth Theory................................................................................................................... 11
Solow Growth Model ................................................................................................................................ 11
OPERATIONAL FRAMEWORK ..................................................................................................................... 13
Data ............................................................................................................................................................. 13
Description of the Variables Used .............................................................................................................. 13
A-Priori Expectations ............................................................................................................................... 14
INITIAL TESTS .............................................................................................................................................. 16
Unit Root Tests ........................................................................................................................................... 16
Graph Analysis ............................................................................................................................................ 16
Dickey-Fuller Unit Root Test ........................................................................................................................ 17
Phillips-Perron Unit Root Test for GDP Growth ........................................................................................... 18
Test for Lag Structure ................................................................................................................................. 19
Hendrys Top-Down Approach .................................................................................................................... 19
Alt and Tinbergen (Ad Hoc Estimation) Method ......................................................................................... 20
Test for Cointegration ................................................................................................................................ 20
Augmented Engle-Granger Test .................................................................................................................. 21
Johansen Cointegration Test ....................................................................................................................... 21
Test for Causality ........................................................................................................................................ 22
Augmented Engle-Granger Causality Test .................................................................................................. 22
STATIC MODEL ............................................................................................................................................ 25
Initial Static Model ..................................................................................................................................... 25
Variance Inflation Factor Test for Multicollinearity .................................................................................... 25
Breusch-Pagan Test for Heteroscedasticity ................................................................................................ 26
Breusch-Godfrey Test for Autocorrelation .................................................................................................. 26

Final Static Model ....................................................................................................................................... 27
Prais-Winsten Robust Regression for Corrective Measures ........................................................................ 27
Final Static Model ....................................................................................................................................... 28
DYNAMIC MODELS ..................................................................................................................................... 29
General Distributed Lag Model .................................................................................................................. 29
Initial General Distributed Lag Model ......................................................................................................... 29
Initial Regression ......................................................................................................................................... 29
Test for Multicollinearity ............................................................................................................................ 29
Test for Heteroscedasticity ......................................................................................................................... 29
Test for Autocorrelation ............................................................................................................................. 30
Prais-Winsten Robust Regression for Corrective Measures ........................................................................ 30
Final General Distributed Lag Model .......................................................................................................... 31
Koyck Infinite Distributed Lag Model ........................................................................................................ 31
OLS Estimation ............................................................................................................................................ 32
Final Koyck Infinite Distributed Lag Model Using OLS ................................................................................ 33
Two-Stage Least Squares (2SLS) Estimation ............................................................................................... 35
Final Koyck Infinite Distributed Lag Model Using 2SLS ............................................................................... 36
Almon Polynomial Distributed Lag (PDL) Model ....................................................................................... 38
Prais-Winsten Robust Regression for Corrective Measures ....................................................................... 39
Final Almon Polynomial Distributed Lag Model .......................................................................................... 40
Autoregressive Distributed Lag Model (ARDL) .......................................................................................... 41

Final Autoregressive Distributed Lag Model ............................................................................................... 42
CONCLUSIONS AND RECOMMENDATIONS ............................................................................................... 43
BIBLIOGRAPHY............................................................................................................................................ 44
INTRODUCTION
Background of the Study
In terms of finding ways on how to improve an economys performance, investment
has always been one of the most common instrument. Investment is usually measured
through gross fixed capital formation, also called net investment, which is defined as the
net amount of the fixed capital acquired. It indicates the rise in the capital stock minus
the removal of fixed assets (Pettinger, n.d.). At the one hand, economic performance is
not only determined by investments because of there are other factors such as
consumption, government expenditures, exports and imports (Blanchard & Johnson,
2013). Given that, it is possible that it is not investment on buildings, machineries,
infrastructures and equipment that leads to an increase in the growth of the economy,
and that it may be the growth of the economy which spurs the increase in the capital
formation of an economy. This issue has actually been in numerous literatures for quite
some time already. In fact, in one of Kuznets studies, it was said that there are situations
wherein economic growth happens before the capital increases (Blostrom, Lipsey &
Zejan, 1993).
The possibility that investments may not affect economic growth and the possibility
that investment determines economic growth will be discussed in the Review of Related
Literature of this paper wherein studies conducted in different countries and regions will
show varying results.
Statement of the Problem

This study aims to answer a number of questions regarding the relationship of
gross fixed capital formation growth and GDP growth. These questions are the following:
1. Is the gross fixed capital formation growth significant in determining the GDP
growth of the Philippines?
2. Is gross fixed capital formation growth a driver GDP growth or is it GDP growth
that is a driver of the gross fixed capital formation growth?
3. How long does gross fixed capital formation growth formation take in order for it to
affect GDP growth?
4. How can the Philippines improve its economy in terms of investments or capital
formations?
Objectives of the Study
This study aims to:
1. Determine the relationship of gross fixed capital formation growth and GDP
growth using dynamic econometric models.
2. Find out the causality between gross fixed capital formation growth and GDP
growth and determine whether the gross fixed capital formation are crucial to
GDP growth in the long-run.
3. Determine how long gross fixed capital formation growth will affect GDP growth.
Significance of the Study

This paper aims to show the relationship of gross fixed capital formation growth
and GDP growth because there may be a need to reconsider the policies of the
government like improving the physical and social infrastructures such as road and
railway constructions or renovations and school and hospital constructions. Given that
Philippines aims to develop and increasing investments and capital formations are taken
into consideration as instruments, this paper will be able to show its possible effects on
the economic growth. Given this, the paper may serve as a basis in future policy-making
with regards to determining how much should be released for capital formation to make
the economy grow further.
Scope and Limitations
This study concentrates on gross fixed capital formation as a determinant of
economic growth, thus, not taking into account other factors such as consumption,
government expenditure, exports and imports. In this study, the data used were taken
from World Banks World Development Indicator covering years 1961 to 2013 which
means that the dataset consists of 53 observations for both gross fixed capital formation
growth and GDP growth.
REVIEW OF RELATED LITERATURE

Capital formation is an established determinant of the economic growth. Given this,
numerous studies were done that used it as an explanatory variable for GDP. The
remaining parts of this section will discuss studies that will show the relation of gross fixed
capital formation and GDP.
Some studies say that it is investments that affect GDP growth. One of which is
the study in India where it was observed that the current investment rate has increased
dramatically since the 1950s. Because of the said increase in investment rate, the
researchers evaluated its effects on the growth of the economy. The results of the said
study showed that although the investment rate is high, its contribution to the GDP per
worker in India is not that high. Furthermore, the study showed that the high investment
rate today will not have a huge effect on the economic growth of India in the future and
that higher investment rates in the future may also have small effect on the growth of the
economy (Robertson, 2010). Another study that poses the same result is the study of De
Long and Summers (1991). Using the machinery and equipment investment and GDP
growth data from 1960 to 1985, the result indicated that a percent increase in GDP that
is spent for machineries and equipment will increase GDP growth by one-third of the
recorded annual percentage point.
There are also studies that say that it is GDP growth that affects investments. In
the study of Blomstrom, Zejan and Lipsey (1993). From the said study, investment was
measured in terms of fixed capital formation contribution to GDP. Simple and multiple
regressions were done using different factors that affect GDP growth. Aside from this,
causality test was also done and it showed that the effect of increase in fixed capital
formation towards the increase in GDP growth is lesser than the effect of increase in GDP
growth towards the increase in fixed capital formation. The researchers also found out
that high fixed capital investment rates contributes to boosting the GDP per capita growth,
however, it is not the only determinant of GDP growth. A similar study is done using the
gross domestic investment and GDP data for Middle East and North Africa (MENA) for
years 1970 to 2010. The said study of Mehrara and Muhsai (2013), indicated that there
is unidirectional causality between GDP and gross domestic investment such that it is
GDP that affects gross domestic investment. Thus, having higher GDP will allow higher
gross domestic investments.
Aside from determining which variable affects which, researchers have also been
interested in determining whether GDP growth and capital formation have long-run and
short-run relationship. A study was conducted in Nigeria which showed that gross fixed
capital formation has no short-run relationship to GDP growth. In addition, the same study
used vector autoregression to determine the long-run relationship of the two variables.
The results showed that gross fixed capital formation, exports and the lagged GDP growth
have long-run relationship with the current GDP growth. The same study also showed
that GDP has a unidirectional causal relationship with exports, gross fixed capital
formation, import and savings (Kanu & Ozurumba, 2014). Another study that showed the
short-run and long-run relationship of capital formation and economic growth is the study
of Mehta (2011). The study used data from India and employed cointegration and vector
error correction model to determine the short-run and long-run relationship of capital
formation and GDP. The cointegration test results showed that capital formation and GDP
have long-run relationship. However, the vector error correction technique yielded
insignificant coefficients which implies that the lagged values of the logarithm of GDP do
not affect capital formation.
Given the related literature discussed, this study aims to fill the gap in the lack of
empirical analysis on the relationship of GDP growth and gross fixed capital formation
growth in the Philippines.
THEORETICAL FRAMEWORK
When talking about investments, what are taken into consideration are business
fixed investments, residential investments and inventory investments. These investments
pertain to equipment, machines, houses, raw materials, work in progress and finished
goods that are stored (Mankiw, 2012). Given this definition, and the fact that gross fixed
capital formations are comprised of land improvements, machinery, equipment and
construction spending, then it is an investment.
Neoclassical Growth Theory
The neoclassical growth theory was first developed by Robert Solow and J.E.
Meade in the late 1950s and early 1960s. The said theory gives emphasis on the
relationship of capital accumulation and savings to economic growth. Specifically, the
theory states that there are two main factors of production such as labor and capital. Later
on, technology was also added in the production function. The claim that output affects
capital accumulation is presented through the Solow growth model.
Solow Growth Model
This model was created by Robert Solow in 1956 which showed the
factors that affect economic growth. From the Solow growth model, it can be
concluded that in the long run, the level of capital determines the level of output
produced. In addition, the level of output determines the level of savings and
investments, and level of capital accumulation. By holding the population,

participation rate and unemployment rates constant and that there is no
technological improvements, it can be said the increases in capital per worker
will increase output per worker. On the other hand, because private savings
equate to investment and is in proportion with income, then investment is in
proportion with income as well. Thus, when the output increases, savings also
increase which in turn increases the investments. Moreover, if it happens that
the capital per worker and output per worker are low, and investment is greater
than the value of depreciation, it will result to increase in capital per worker
and output per worker as time goes by. However, if capital per worker and
output per worker are high, and investments is less than the value of
depreciation, then capital per worker will decrease as time goes by (Blanchard
& Johnson, 2013). These relationships can be shown through the table below
such that the green arrow shows the first relationship, while the blue and
purple arrows indicate the second relationship.
Figure 3.1: Capital, Output and Saving/Investment (Blanchard & Johnson, 2013).
OPERATIONAL FRAMEWORK
Data
. tsset year
time variable:
delta:
year, 1961 to 2013

1 unit
In using dynamic models in econometrics, it is essential to ensure that the data

used is time series data. In this study, the data for the Philippine gross fixed capital
formation and economic growth are taken from the World Bank and it covers years 1961
to 2013, giving us 53 observations. Before proceeding with the tests and regressions, the
command tsset is used in Stata 12 in order to set the variables into time series form.
To show the relationship between gross fixed capital formation and GDP growth,
the data should be tested in terms of its stationarity, cointegration and causality which will
be shown in the next chapter of this paper. The table below shows the summary of all the
variables in the study.
. summarize
Variable |
Obs
Mean
Std. Dev.
Min
Max
-------------+-------------------------------------------------------year |
53
1987
15.44345
1961
2013
gfcfgr |
53
5.435404
11.0547 -31.49475
31.98448
gdpgr |
53
4.167703
3.027177 -7.323683
8.920647
Description of the Variables Used

It is essential to identify the dependent variable and independent variable and its
specifications first before dealing with the tests and the regressions. The table below
shows the descriptions of the variables used.
DEPENDENT VARIABLE
gdpgr
Gross
domestic
growth
product It is the annual percentage

change of GDP which is
based on the constant
local currency.
INDEPENDENT VARIABLE
Variable
Label
gfcfgr
Gross
Description
fixed
formation growth
capital It is the annual percentage

change
of
capital
formation
consists
gross
of
fixed
which
land
improvements,
machineries,
equipment,
construction spending, etc.

at market prices based on
the constant local currency.
A-Priori Expectations
INDEPENDENT
VARIABLE
gfcfgr
ALGEBRAIC SIGN
EXPLANATION
More fixed capital formation

will mean that more roads
and
facilities
constructed.
will
Given
be
this,
transferring of goods will be

faster and thus, increasing
the income of the country.
The model will be written as:
= 1 + 2 +
INITIAL TESTS
Unit Root Tests
This is also known as the test for stationarity which is a requirement in a time
series analysis. The reason behind this is that non-stationary data will lead to results
that can be used for making conclusions. Therefore, it means that if a data is nonstationary, the results that will be taken from different periods will be different because
the mean and variance over time also differ (Gujarati & Porter, 2009).
In order to check the stationarity of gross fixed capital formation and GDP
growth, the graph of both variables will be analyzed. In addition, unit root testing such
as Dickey-Fuller test and Phillips-Perron test will also be used.
Graph Analysis
-40
-20
20
40
. tsline gdpgr gfcfgr
1960
1970
1980
1990
year
gdpgr
2000
gfcfgr
2010
It can be observed that the line graphs for both GDP growth (gdpgr) and gross
fixed capital formation (gfcfgr) do not show any trend or breaks that may lead to making
the data for variables to become non-stationary. Given that the graph shows that the data
for the variables are stationary, it is still best to use other tests to ensure that this
conclusion is correct.
Dickey-Fuller Unit Root Test

. dfuller gdpgr
Dickey-Fuller test for unit root
Number of obs
52
---------- Interpolated Dickey-Fuller --------Test

1% Critical
5% Critical
10% Critical
Statistic
Value
Value
Value
-----------------------------------------------------------------------------Z(t)
-4.106
-3.577
-2.928
-2.599
-----------------------------------------------------------------------------MacKinnon approximate p-value for Z(t) = 0.0009
. dfuller gfcfgr
Dickey-Fuller test for unit root
Number of obs
52

1% Critical
5% Critical
10% Critical
Statistic
Value
Value
Value
-----------------------------------------------------------------------------Z(t)
-5.360
-3.577
-2.928
-2.599
Given the Dickey-Fuller unit root test above, the result shows that both GDP growth
and gross fixed capital formation growth are stationary which means that they do not have
unit roots. Therefore, there is no need to get the first difference of both variables. This is
so because for GDP growth, the absolute value of the test statistic (-4.106) is greater than
the absolute value of the critical value at 5% (-2.928). On the other hand, for gross fixed
capital formation growth, the absolute value of its test statistic (-5.360) is also greater than
the absolute value of the critical value at 5% (-2.928). Furthermore, if the p-value will
serve as the basis to know the stationarity of the data, the result will also be consistent
as the p-value for Z(t) for both GDP growth and gross fixed capital formation growth are
less than 0.05 which means that the null hypothesis that there is unit root is rejected.
Phillips-Perron Unit Root Test for GDP Growth

. pperron gdpgr
Phillips-Perron test for unit root
Number of obs
=
Newey-West lags =
52
3

1% Critical
5% Critical
10% Critical
Statistic
Value
Value
Value
-----------------------------------------------------------------------------Z(rho)
-26.591
-18.936
-13.316
-10.712
Z(t)
-4.105
-3.577
-2.928
-2.599
. pperron gfcfgr
Phillips-Perron test for unit root
Number of obs
=
Newey-West lags =
52
3

1% Critical
5% Critical
10% Critical
Statistic
Value
Value
Value
-----------------------------------------------------------------------------Z(rho)
-35.877
-18.936
-13.316
-10.712
Z(t)
-5.300
-3.577
-2.928
-2.599
The null hypothesis for the Phillips-Perron test is that there is non-stationarity or
that there is a unit root. In the case of GDP growth, the p-value of Z(t) is also less than
0.05 and the absolute value of the test statistic of Z(rho) (-26.591) is greater than the
absolute value of the critical value at 5% (-13.316). On the other hand, for the gross fixed
capital formation growth, the p-value of Z(t) is also less than 0.05 and the absolute value
of the test statistic of Z(rho) (-35.877) is greater than the absolute value of the critical
value at 5% (-13.316). Therefore, the result of the Phillips-Perron test implies that the null
hypothesis should be rejected, meaning there is no unit roots and the data is stationary.
Test for Lag Structure

It is important to determine the optimal lag structure to find out the longest period
of time that the lagged value of a variable can affect the current value of a variable (Hill,
Griffiths & Lim, 2011). To find out the maximum lag, Hendrys top-down approach and
Alt and Tinbergen or the Ad Hoc Estimation Method will be used.
Hendrys Top-Down Approach

. varsoc gdpgr gfcfgr
Selection-order criteria
Sample: 1965 - 2013
Number of obs
=
49
+---------------------------------------------------------------------------+
|lag |
LL
LR
df
p
FPE
AIC
HQIC
SBIC
|
|----+----------------------------------------------------------------------|
| 0 | -290.294
520.423
11.9304
11.9597
12.0076* |
| 1 | -282.624
15.34*
4 0.004 448.157* 11.7806* 11.8685* 12.0122 |
| 2 | -281.073 3.1029
4 0.541 495.815
11.8805
12.027
12.2666 |
| 3 | -278.582 4.9823
4 0.289 528.635
11.9421
12.1472
12.4826 |
| 4 | -277.269 2.6253
4 0.622
592.58
12.0518
12.3155
12.7468 |
+---------------------------------------------------------------------------+
Endogenous: gdpgr gfcfgr
Exogenous: _cons
The
Final
Prediction
Error
(FPE),
Akaike
Information
Criterion
(AIC),
Bayesian/Schwartz Criterion Information (SBIC) and Hannan-Quinn Information Criterion

(HQIC) will serve as basis to determine the optimal lag. The results from the table above
implies that FPE, AIC and HQIC shows that the optimal lag is one while SBIC shows that
the optimal lag is zero. Therefore, the optimal lag should be one since most of the
information criterion chose lag one.
Alt and Tinbergen (Ad Hoc Estimation) Method

. regress gdpgr gfcfgr l1.gfcfgr
Source |
SS
df
MS
-------------+-----------------------------Model | 266.272143
2 133.136071
Residual | 208.105933
49 4.24705985
-------------+-----------------------------Total | 474.378076
51 9.30153089
Number of obs
F( 2,
49)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
52
31.35
0.0000
0.5613
0.5434
2.0608
-----------------------------------------------------------------------------gdpgr |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------gfcfgr |
--. |
.1987499
.0270498
7.35
0.000
.1443913
.2531084
L1. |
.0222847
.0269705
0.83
0.413
-.0319145
.0764838
|
_cons |
2.975012
.3336207
8.92
0.000
2.304576
3.645448
------------------------------------------------------------------------------
Upon adding one lag of gross fixed capital formation growth to the regression, the
result showed that the lagged variable has a p-value of 0.413 which means that it is
insignificant. Therefore, the regression should stop at the first lag.
The results of both Hendry top-down approach and Alt and Tinbergen method are
consistent. Therefore, the optimal lag should be one.
Test for Cointegration

In this test, the movement of the variable together over time is considered to find
out whether there is a relationship between the two variables in the long run. This test
serves as a proof that the results are not spurious (Gujarati &Porter, 2009).
In this section, Augmented Engle-Granger Test and Johansen Cointegration Test
will be used to determine whether there is a long run relationship between gross fixed
capital formation growth and GDP growth.
Augmented Engle-Granger Test

. regress gdpgr gfcfgr
Source |
SS
df
MS
-------------+-----------------------------Model | 265.379461
1 265.379461
Residual | 211.138226
51 4.13996522
-------------+-----------------------------Total | 476.517688
52 9.16380169
Number of obs
F( 1,
51)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
53
64.10
0.0000
0.5569
0.5482
2.0347
-----------------------------------------------------------------------------gdpgr |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------gfcfgr |
.2043549
.0255241
8.01
0.000
.1531132
.2555965
_cons |
3.056952
.3120249
9.80
0.000
2.430536
3.683368
-----------------------------------------------------------------------------. predict uhat, residual
. regress d.uhat l.uhat l.d.uhat
Source |
SS
df
MS
-------------+-----------------------------Model | 93.7753949
2 46.8876975
Residual | 178.765914
48 3.72428988
-------------+-----------------------------Total | 272.541309
50 5.45082619
Number of obs
F( 2,
48)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
51
12.59
0.0000
0.3441
0.3167
1.9298
-----------------------------------------------------------------------------D.uhat |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------uhat |
L1. | -.7331103
.1651285
-4.44
0.000
-1.065123
-.4010971
LD. |
.100608
.1420287
0.71
0.482
-.1849597
.3861758
|
_cons | -.0410718
.2703671
-0.15
0.880
-.5846813
.5025377
------------------------------------------------------------------------------
The result shows that the t-ratio of the lagged residual is -4.44 that is less than the
critical value at 5% for a cointegration regression which is -3.37. Given this, the null
hypothesis that the residuals in the least squares is non-stationary is rejected. Therefore,
the residuals are stationary, and GDP growth and gross fixed capital formation growth
are cointegrated.
Johansen Cointegration Test
. vecrank gdpgr gfcfgr, lags(1)
Johansen tests for cointegration
Trend: constant
Sample: 1962 - 2013
Number of obs =
Lags =
52
1
------------------------------------------------------------------------------5%
maximum
trace
critical
rank
parms
LL
eigenvalue statistic
value
0
2
-323.88075
.
46.2615
15.41
1
5
-308.25257
0.45178
15.0052
3.76
2
6
-300.74999
0.25066
-------------------------------------------------------------------------------
The trace statistic of rank 0 or line 1 (46.2615) is greater than the critical value at
5% (15.41). In addition, the trace statistic of rank 1 or line 2 (15.0052) is also greater than
the critical value at 5% (3.76). Given these, there is a strong evidence against the null
hypothesis that there are equations that are not cointegrated, meaning that the variables
are cointegrated with each other. Therefore, GDP growth and gross fixed capital
formation growth are cointegrated.
Test for Causality

Given that the variables have long-run relationship and are stationary, the cause
and effect relationship of the variables may be determined through testing for causality.
Therefore, at this part of the paper the question of Is it gross fixed capital formation
growth that drives GDP growth? and Is it GDP growth that drives gross fixed capital
formation growth? will be answered.
To answer this question, vector autoregressive model is ran prior to running the
command to determine the Granger causality of the variables.
Augmented Engle-Granger Causality Test
. var gdpgr gfcfgr, lags(1)
Vector autoregression
Sample: 1962 - 2013
Log likelihood =
-300.75
FPE
= 456.0393
No. of obs
AIC
HQIC
=
=
=
52
11.79808
11.88439
Det(Sigma_ml)
361.9671
SBIC
12.02322
Equation
Parms
RMSE
R-sq
chi2
P>chi2
---------------------------------------------------------------gdpgr
3
2.69515
0.2497
17.30546
0.0002
gfcfgr
3
10.4742
0.1433
8.698708
0.0129
--------------------------------------------------------------------------------------------------------------------------------------------|
Coef.
Std. Err.
z
P>|z|
-------------+---------------------------------------------------------------gdpgr
|
gdpgr |
L1. |
.6255078
.1813128
3.45
0.001
.2701412
.9808745
|
gfcfgr |
L1. |
-.05017
.0493318
-1.02
0.309
-.1468585
.0465186
|
_cons |
1.835601
.6817613
2.69
0.007
.4993736
3.171829
-------------+---------------------------------------------------------------gfcfgr
|
gdpgr |
L1. |
1.434962
.7046394
2.04
0.042
.0538945
2.81603
|
gfcfgr |
L1. | -.0176717
.1917191
-0.09
0.927
-.3934342
.3580908
|
_cons | -.5381844
2.649541
-0.20
0.839
-5.73119
4.654821
-----------------------------------------------------------------------------. vargranger
Granger causality Wald tests
+------------------------------------------------------------------+
|
Equation
Excluded |
chi2
df Prob > chi2 |
|--------------------------------------+---------------------------|
|
gdpgr
gfcfgr | 1.0343
1
0.309
|
|
gdpgr
ALL | 1.0343
1
0.309
|
|--------------------------------------+---------------------------|
|
gfcfgr
gdpgr | 4.1471
1
0.042
|
|
gfcfgr
ALL | 4.1471
1
0.042
|
+------------------------------------------------------------------+
The null hypothesis for the first box is that the lagged gross fixed capital formation
growth does not Granger-cause GDP growth. The prob>chi2 shows that insignificance at
5% because it is greater than 0.05. This means that there is no evidence against the null
hypothesis. Therefore, the lagged gross fixed capital formation growth does not Grangercause GDP growth. On the other hand, for the second box, the null hypothesis is that the
lagged GDP growth does not Granger-cause gross fixed capital formation growth. For
this, the prob>chi2 is 0.042 which implies that it is significant at 5%. This means that there
is a strong evidence against the null hypothesis. Therefore, the null hypothesis is rejected
which means that the lagged GDP growth Granger-cause gross fixed capital formation
growth.
The results show that gross fixed capital formation does not Granger-cause GDP
growth. Because of this, the rest of the paper will be looking at the correlation of the
variables instead of claiming that gross fixed capital formation growth Granger-causes
GDP growth since it may result to incorrect results and interpretations. Thus, GDP growth
will be the dependent variable and gross fixed capital formation growth will be the
independent variable.
STATIC MODEL
Initial Static Model
The estimates shown below are determined using Ordinary Least Squares estimation
method.
. regress gdpgr gfcfgr
Source |
SS
df
MS
-------------+-----------------------------Model | 265.379461
1 265.379461
Residual | 211.138226
51 4.13996522
-------------+-----------------------------Total | 476.517688
52 9.16380169
Number of obs
F( 1,
51)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
53
64.10
0.0000
0.5569
0.5482
2.0347
-----------------------------------------------------------------------------gdpgr |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------gfcfgr |
.2043549
.0255241
8.01
0.000
.1531132
.2555965
_cons |
3.056952
.3120249
9.80
0.000
2.430536
3.683368
------------------------------------------------------------------------------
To validate the results shown above, the estimation results should be checked if it
violates the Classical Linear Regression Model (CLRM) assumptions. If in case it violates
the assumptions, there is a need to correct it which may cause the estimates to change.
The following sections of this chapter will present the tests and needed corrections.
Variance Inflation Factor Test for Multicollinearity

Multicollinearity occurs if there are two or more independent variables in the
multiple regression model that have perfect or exact linear relationship (Gujarati & Porter,
2009). To find out whether there is multicollinearity in the model, the variance inflation
factor test will be used. If the result of the mean vif is 10, it will imply that there is
multicollinearity.
. vif
Variable |
VIF
1/VIF
-------------+---------------------gfcfgr |
1.00
1.000000
-------------+----------------------
Mean VIF |
1.00
The result shows that mean vif is 1. Since this is clearly less than 10, then the
model does not suffer from multicollinearity.
Breusch-Pagan Test for Heteroscedasticity

One of the assumptions of Classical Linear Regression Model (CLRM) is
homoscedasticity which means that the variance of each disturbance term is constant
(Gujarati & Porter, 2009). To find out if the variance is constant or not, the Breusch-Pagan
heteroscedasticity test will be used.
. hettest
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
Ho: Constant variance
Variables: fitted values of gdpgr
chi2(1)
Prob > chi2
=
=
2.24
0.1347
The p-value is 0.1347 which is clearly greater than 0.05. Given this, there is no
evidence against the null hypothesis that the variance is constant. The null hypothesis
will be accepted and thus, there is homoscedasticity.
Breusch-Godfrey Test for Autocorrelation

Another assumption under the Classical Linear Regression Model (CLRM) is that
there is no autocorrelation which means that the disturbance term of an observation is
not affected by the disturbance term of another observation (Gujarati & Porter, 2009). To
find out if autocorrelation exists, the Breusch-Godfrey test will be used.
. bgodfrey
Breusch-Godfrey LM test for autocorrelation
--------------------------------------------------------------------------lags(p) |
chi2
df
Prob > chi2
-------------+------------------------------------------------------------1
|
6.135
1
0.0133
--------------------------------------------------------------------------H0: no serial correlation
The test generated a p-value which is equal to 0.0133. This implies that the null
hypothesis that there is no serial correlation or autocorrelation is rejected. Therefore,
there exists autocorrelation and there is a need to correct it.
Final Static Model

Prais-Winsten Robust Regression for Corrective Measures
One way to solve autocorrelation is to use Prais-Winsten Robust Regression. The
result of this regression is shown below.
. prais gdpgr gfcfgr, robust

Iteration
Iteration
Iteration
Iteration
Iteration
Iteration
Iteration
Iteration
Iteration
0:
1:
2:
3:
4:
5:
6:
7:
8:
rho
rho
rho
rho
rho
rho
rho
rho
rho
=
=
=
=
=
=
=
=
=
0.0000
0.3310
0.3796
0.3859
0.3867
0.3868
0.3868
0.3868
0.3868
Prais-Winsten AR(1) regression -- iterated estimates

Linear regression
Number of obs =
F( 1,
51) =
Prob > F
=
R-squared
=
Root MSE
=
53
25.74
0.0000
0.5080
1.901
-----------------------------------------------------------------------------|
Semirobust
gdpgr |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------gfcfgr |
.1764056
.0347717
5.07
0.000
.1065986
.2462126
_cons |
3.229319
.4859764
6.65
0.000
2.25368
4.204957
-------------+---------------------------------------------------------------rho |
.3868144
------------------------------------------------------------------------------
Durbin-Watson statistic (original)

1.332861
Durbin-Watson statistic (transformed) 1.918059
Now that the problem of autocorrelation is solved, the results can be used for the
final static model.
Final Static Model

= 3.229319 + 0.1764056()
The results show that gross fixed capital formation growth is statistically significant
at 1% significance level. In addition, the results show that there is a positive relationship
between gross fixed capital formation growth and GDP growth which means that the
effect of an increase in gross fixed capital formation growth will increase GDP growth by
0.1764056, ceteris paribus. Lastly, the R-squared is 50.80% which shows the goodness
of fit of the model.
DYNAMIC MODELS
General Distributed Lag Model
Initial General Distributed Lag Model
The following are the initial regression of the General Distributed Lag Model and
the CLRM tests.
Initial Regression
Source |
SS
df
MS
-------------+-----------------------------Model | 266.272143
2 133.136071
Residual | 208.105933
49 4.24705985
-------------+-----------------------------Total | 474.378076
51 9.30153089
Number of obs
F( 2,
49)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
52
31.35
0.0000
0.5613
0.5434
2.0608
-----------------------------------------------------------------------------gdpgr |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------gfcfgr |
--. |
.1987499
.0270498
7.35
0.000
.1443913
.2531084
L1. |
.0222847
.0269705
0.83
0.413
-.0319145
.0764838
|
_cons |
2.975012
.3336207
8.92
0.000
2.304576
3.645448
------------------------------------------------------------------------------
Test for Multicollinearity

. vif
Variable |
VIF
1/VIF
-------------+---------------------gfcfgr |
L1. |
1.08
0.925014
--. |
1.08
0.925014
-------------+---------------------Mean VIF |
1.08
Test for Heteroscedasticity

. hettest
chi2(1)
Prob > chi2
=
=
1.35
0.2456
Test for Autocorrelation

. bgodfrey
--------------------------------------------------------------------------lags(p) |
chi2
df
Prob > chi2
-------------+------------------------------------------------------------1
|
6.753
1
0.0094
It can be seen that the null hypothesis that there is no serial correlation will be
rejected since the p-value that was generated from the Breusch-Godfrey test for
autocorrelation (0.0094) is less than 0.05. Therefore, there is autocorrelation and it should
be corrected.

. prais gdpgr gfcfgr l1.gfcfgr, robust
Iteration
Iteration
Iteration
Iteration
Iteration
Iteration
Iteration
0:
1:
2:
3:
4:
5:
6:
rho
rho
rho
rho
rho
rho
rho
=
=
=
=
=
=
=
0.0000
0.3475
0.3724
0.3743
0.3744
0.3745
0.3745

Linear regression
Number of obs =
F( 2,
49) =
Prob > F
=
R-squared
=
Root MSE
=
52
13.00
0.0000
0.5148
1.9202
-----------------------------------------------------------------------------|
Semirobust
gdpgr |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------gfcfgr |
--. |
.1803885
.0353781
5.10
0.000
.1092936
.2514833
L1. |
.0209369
.0288574
0.73
0.472
-.0370542
.0789281
|
_cons |
3.122936
.5023444
6.22
0.000
2.113438
4.132435
-------------+---------------------------------------------------------------rho |
.3744517
-----------------------------------------------------------------------------Durbin-Watson statistic (original)

1.274561
Now that the problem of autocorrelation is corrected, the results can now be used
for the final General Distributed Lag Model.
Final General Distributed Lag Model

After the corrective measure using the Prais-Winsten Robust Regression, the final
General Distributed Lag Model is
= 3.122936 + 0.1803885( ) + 0.0209369(1 )
The final General Distributed Lag Model has an optimal lag of 1 as shown in the
Hendry top-down approach and the Alt and Tinbergen approach. The results show that
as the current gross fixed capital growth increases by 1%, current GDP growth also
increases by 0.1803885%, ceteris paribus. In addition, although the past gross fixed
capital formation growth is insignificant, its coefficient is in accordance with the a-priori
expectation. Thus, as the past gross fixed capital formation growth increases by 1%, the
current GDP growth also increases by 0.0209369%. Furthermore, its R-squared is
51.48% which means that the goodness of fit of the final General Distributed Lag Model
is better than the static model.
Koyck Infinite Distributed Lag Model

The Koyck Model has an assumption that there is a main beta called the impact
multiplier that decreases geometrically with the lambda lag as time passes by. In simple
words, it assumes that the policy variable from the past has an effect to the current value
of the dependent variable. According to Rufino (2008), this model has a good reputation
because of the idea that the effect of the policy variable is greatest at the year that it is
implemented while it continuously declines as years go by. The effect of the policy
variable expands infinitely which makes it an infinite distributed lag model. Furthermore,
the model is an autoregressive model because the lagged dependent variable is on the
right-hand side of the equation.
There are two ways to estimate the model. One is by using Ordinary Least Squares
estimation. The other is by using Two-Stage Least Squares estimation. The Koyck model
that will use OLS estimation will be written as:
= (1 ) + 0 ( ) + ( ) + ( 1 )
OLS Estimation
. regress gdpgr gfcfgr l1.gdpgr
Source |
SS
df
MS
-------------+-----------------------------Model | 286.098169
2 143.049084
Residual | 188.279907
49 3.84244708
-------------+-----------------------------Total | 474.378076
51 9.30153089
Number of obs
F( 2,
49)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
52
37.23
0.0000
0.6031
0.5869
1.9602
-----------------------------------------------------------------------------gdpgr |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------gfcfgr |
.1802705
.0267331
6.74
0.000
.1265483
.2339928
|
gdpgr |
L1. |
.238248
.0979662
2.43
0.019
.0413776
.4351184
|
_cons |
2.211521
.4614323
4.79
0.000
1.284238
3.138804
------------------------------------------------------------------------------

. vif
Variable |
VIF
1/VIF
-------------+----------------------
gdpgr |
L1. |
1.17
0.856830
gfcfgr |
1.17
0.856830
-------------+---------------------Mean VIF |
1.17

. hettest
chi2(1)
Prob > chi2
=
=
0.89
0.3456

. bgodfrey
--------------------------------------------------------------------------lags(p) |
chi2
df
Prob > chi2
-------------+------------------------------------------------------------1
|
2.503
1
0.1136
Final Koyck Infinite Distributed Lag Model Using OLS

= 2.11521 + 0.1802705( ) + 0.238248(1 )
The initial regression did not violate multicollinearity, homoscedasticity and nonautocorrelation assumptions which is why the results of the OLS initial estimation will be
used for the final Koyck Infinite Distributed Lag Model. The coefficients of the Koyck model
are all significant and in accordance with the a-priori expectations. The impact multiplier
is .1802705. On the other hand, the rate of decay is .238248. Therefore, a percent
increase in gross fixed capital formation growth will lead to a 0.1802705% increase in
current GDP growth. In addition, a percent increase in the past years GDP growth will
lead to a 0.238248% increase in the current GDP growth. Lastly, the goodness of fit of
the model is 60.31%
It must be noted that the results cannot be used for the conclusion because the
lagged GDP growth is endogenous which violates the exogeneity assumption of CLRM.
Thus, these results are biased and inconsistent.
For Koyck models, there are other values that can be interpreted. These are mean
lag, median lag, alpha and the long run multiplier. The computations for these are shown
below.
Alpha = (1 )
= (1 .238248) = 2.211521
= = 2.9032034
Mean lag =
0.238348
10.238248
Median lag =
= 0.3127632
2
log(0.238248)
Long-run multiplier = =
0
1
= 0.4832169
.0267331
1.0.238248
= 0.03509423
The OLS estimates will be used for the Distributed Lag Model written below which
can be interpreted as the effect of gross fixed capital formation growth increases GDP
growth by 0.03409423 of the increase gross fixed capital formation.
= + +
= 2.9032034 + 0.03409423
Two-Stage Least Squares (2SLS) Estimation
As previously seen from the OLS estimation, there is high R-squared that suggests
the goodness of fit of the model. Furthermore, the OLS estimation shows that the current
gross fixed capital formation growth and the lagged GDP growth are significant and
intuitive. However, because of the possibility of endogeneity in the right-hand side of the
equation due to the inclusion of the lagged GDP growth as an independent variable, then
it means that the assumption of exogeneity in CLRM must have been violated which will
lead to spurious results since the estimates will become biased and inconsistent.
Therefore, this issue should be addressed. In order to address the problem of
endogeneity, Two-Stage Least Squares (2SLS) estimation will be used by using an
instrumental variable to replace the endogenous lagged dependent variable in the righthand side of the equation.
Shown below are the initial 2SLS regression and the test for autocorrelation.
. ivreg gdpgr gfcfgr (l1.gdpgr=gfcfgr l1.gfcfgr), first

First-stage regressions
----------------------Source |
SS
df
MS
-------------+-----------------------------Model | 274.431837
2 137.215919
Residual | 192.830531
49 3.93531696
-------------+-----------------------------Total | 467.262369
51 9.16200723
Number of obs
F( 2,
49)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
52
34.87
0.0000
0.5873
0.5705
1.9838
-----------------------------------------------------------------------------L.gdpgr |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------gfcfgr |
--. |
.051473
.0260381
1.98
0.054
-.0008525
.1037985
L1. |
.1885336
.0259617
7.26
0.000
.1363615
.2407057
|
_cons |
2.837465
.3211432
8.84
0.000
2.192104
3.482826
-----------------------------------------------------------------------------Instrumental variables (2SLS) regression
Source |
SS
df
MS
-------------+-----------------------------Model | 280.328307
2 140.164153
Residual | 194.049769
49 3.96019936
-------------+-----------------------------Total | 474.378076
51 9.30153089
Number of obs
F( 2,
49)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
52
33.62
0.0000
0.5909
0.5742
1.99
-----------------------------------------------------------------------------gdpgr |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------gdpgr |
L1. |
.1182
.1381382
0.86
0.396
-.1593991
.3957991
|
gfcfgr |
.1926658
.0288885
6.67
0.000
.1346122
.2507193
_cons |
2.639624
.5799338
4.55
0.000
1.474203
3.805044
-----------------------------------------------------------------------------Instrumented: L.gdpgr
Instruments:
gfcfgr L.gfcfgr
------------------------------------------------------------------------------

. dwstat
Durbin-Watson d-statistic(
3,
52) =
1.447762
The d-statistic is equal to 1.447762. Because it is closer to 2 than 0, then there is

no autocorrelation. Therefore, the initial 2SLS regression results can be used for the final
Koyck Infinite Distributed Lag Model.
Final Koyck Infinite Distributed Lag Model Using 2SLS
= 2.639624 + 0.1926658( ) + 0.1182(1 )
The final Koyck Infinite Distributed Lag Model that was estimated
using 2SLS now
has the best linear unbiased estimates (BLUE)
because it does not violate the assumptions CLRM. Given the regression
results, the impact multiplier is 0.1926658 while the rate of decay is 0.1182.
It can also be seen that the lagged GDP growth is insignificant, its coefficient
is consistent with the a-priori expectation that it positively affects the current
GDP growth. Therefore, a percent increase in gross fixed capital formation
growth will increase the current GDP growth by 0.1926658% while a percent
increase in the lagged GDP growth will increase the current GDP growth by
0.1182%, ceteris paribus.
Alpha = (1 )
= (1 0.1182) = 2.639624
= = 2.99344976
Mean lag =
0.1182
10.1182
Median lag =
= 0.134044
2
2
log(0.1182)
Long-run multiplier = =
0
1
= 0.3246018
0.1926658
10.1182
= 0.21849149
The long-run equation of the Koyck Distributed Lag Model that was estimated
using 2SLS is shown below. It can be said that effect of the increase in gross fixed
capital formation growth increases GDP growth by 0.21849149 of the increase in
gross fixed capital formation. The long-run equations are not evaluated for the
standard errors and significance.
= + +
= 2.99344976 + 0.21849149
Almon Polynomial Distributed Lag (PDL) Model
The Koyck model has coefficients the geometrically decreases as the number of
lags increase which makes it restrictive. Given this and that the restrictions are valid, the
estimates become more efficient but biased and inconsistent if the restrictions are invalid.
To avoid this issue, Almon Polynomial Distributed Lag Model may be used. This model
assumes that the optimal number of lags and the polynomial degree are arbitrarily chosen
(Rufino, 2008).
In this model, the lagged values of the independent variable are located on the
right-hand side of the equation. Given that the Hendry top-down approach showed that
the optimal lag should be 1, then it will be used.
Initial Regression
Source |
SS
df
MS
-------------+-----------------------------Model | 266.272143
2 133.136071
Residual | 208.105933
49 4.24705985
-------------+-----------------------------Total | 474.378076
51 9.30153089
Number of obs
F( 2,
49)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
52
31.35
0.0000
0.5613
0.5434
2.0608
-----------------------------------------------------------------------------gdpgr |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------gfcfgr |
--. |
.1987499
.0270498
7.35
0.000
.1443913
.2531084
L1. |
.0222847
.0269705
0.83
0.413
-.0319145
.0764838
|
_cons |
2.975012
.3336207
8.92
0.000
2.304576
3.645448
------------------------------------------------------------------------------

. vif
Variable |
VIF
1/VIF
-------------+---------------------gfcfgr |
L1. |
1.08
0.925014
--. |
1.08
0.925014
-------------+---------------------Mean VIF |
1.08

. hettest
chi2(1)
Prob > chi2
=
=
1.35
0.2456

. bgodfrey
--------------------------------------------------------------------------lags(p) |
chi2
df
Prob > chi2
-------------+------------------------------------------------------------1
|
6.753
1
0.0094

. prais gdpgr gfcfgr l1.gfcfgr, robust
Iteration
Iteration
Iteration
Iteration
Iteration
Iteration
Iteration
0:
1:
2:
3:
4:
5:
6:
rho
rho
rho
rho
rho
rho
rho
=
=
=
=
=
=
=
0.0000
0.3475
0.3724
0.3743
0.3744
0.3745
0.3745

Linear regression
Number of obs =
F( 2,
49) =
Prob > F
=
52
13.00
0.0000
R-squared
Root MSE
=
=
0.5148
1.9202
-----------------------------------------------------------------------------|
Semirobust
gdpgr |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------gfcfgr |
--. |
.1803885
.0353781
5.10
0.000
.1092936
.2514833
L1. |
.0209369
.0288574
0.73
0.472
-.0370542
.0789281
|
_cons |
3.122936
.5023444
6.22
0.000
2.113438
4.132435
-------------+---------------------------------------------------------------rho |
.3744517
-----------------------------------------------------------------------------Durbin-Watson statistic (original)
1.274561
Now that the model has undergone the necessary corrective measure, the results
from the Prais-Winsten Robust Regression can now be used for the final Almon
Polynomial Distributed Lag Model.
Final Almon Polynomial Distributed Lag Model

= 3.122936 + 0.1803885() + 0.0209369()1
It can be seen that the current and the lagged gross fixed capital formation growth
positively affects the current GDP growth. Although the p-value of the lagged gross fixed
capital formation growth is 0.472 is greater than 0.05 which makes the variable
insignificant, its coefficient is consistent with the a-priori expectation. Thus, a percent
increase in the current gross fixed capital formation and lagged gross fixed capital
formation growth will increase the current GDP growth by 0.1803885% and 0.0209369%,
respectively. In addition, it has an R-squared of 51.48% which represents the goodness
of fit of the model.
Autoregressive Distributed Lag Model (ARDL)

After determining the results of AR and DL models, what will be determined now
is the combination of the two, called the ARDL model. In this model, the dependent and
independent variables are lagged. Because the Hendry top-down approach and Alt and
Tinbergen estimation resulted to having 1 as the optimal number of lag, then it will be
employed in this model.
Initial Regression
. regress gdpgr gfcfgr l1.gfcfgr l1.gdpgr
Source |
SS
df
MS
-------------+-----------------------------Model | 292.307989
3 97.4359962
Residual | 182.070087
48 3.79312682
-------------+-----------------------------Total | 474.378076
51 9.30153089
Number of obs
F( 3,
48)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
52
25.69
0.0000
0.6162
0.5922
1.9476
-----------------------------------------------------------------------------gdpgr |
Coef.
Std. Err.
t
P>|t|
-------------+---------------------------------------------------------------gfcfgr |
--. |
.1798361
.0265632
6.77
0.000
.1264273
.233245
L1. | -.0469919
.0367268
-1.28
0.207
-.120836
.0268522
|
gdpgr |
L1. |
.3674497
.1402526
2.62
0.012
.0854531
.6494464
|
_cons |
1.932386
.5077205
3.81
0.000
.9115458
2.953227
------------------------------------------------------------------------------

. vif
Variable |
VIF
1/VIF
-------------+---------------------gdpgr |
L1. |
2.42
0.412681
gfcfgr |
L1. |
2.24
0.445521
--. |
1.17
0.856690
-------------+---------------------Mean VIF |
1.95

. hettest

chi2(1)
Prob > chi2
=
=
0.46
0.4972

. bgodfrey
--------------------------------------------------------------------------lags(p) |
chi2
df
Prob > chi2
-------------+------------------------------------------------------------1
|
1.084
1
0.2979
Final Autoregressive Distributed Lag Model

Because the initial regression did not violate the tests for the CLRM assumptions,
then its results can be used for the final Autoregressive Distributed Lag Model. Thus, the
final model is:
= 1.932386 + 0.1798361() 0.0469919()1
+ 0.3674497()1
The results show that the current gross fixed capital formation growth and the
lagged GDP growth have significant relationship to the current GDP growth. However,
this is not the case for the lagged gross fixed capital formation growth. To interpret the
results, a percent increase in the current gross fixed capital formation growth will increase
GDP growth by 0.1798361% and a percent increase in the lagged GDP growth will
increase the current GDP by 0.3674497%. In addition, the model has an R-square which
is equal to 61.62% which represents the goodness of fit.
CONCLUSIONS AND RECOMMENDATIONS

The significance of this paper was shown through determining the effect of gross
fixed capital formation growth on GDP growth. After using various dynamic models such
General Distributed Lag Model, Koyck Infinite Distributed Lag Model estimated through
OLS and 2SLS and Autoregressive Distributed Lag Model, the results showed that the
current value of the gross fixed capital formation growth really has a positive
relationship with GDP growth. However, the result regarding the effect of the lagged
gross fixed capital formation growth is ambiguous because it is only significant in the
Almon Polynomial Distributed Lag Model. In addition, the lagged GDP growth also
poses ambiguous results because it is only significant at the Autoregressive Distributed
Lag Model and the Koyck Infinite Distributed Lag Model estimated using OLS.
The result that gross fixed capital formation growth positively affects GDP growth
but does nog Granger-cause GDP growth is consistent with most empirical literature.
One of which is the study of Blomstrom, Zejan and Lipsey (1993) that determined
causality through using five-year periods after the World War II. In the said study, it was
concluded that fixed capital formation is not the key to economic growth.
For future researches regarding this topic, it is suggested that the number of
observations may be increased since it may cause changes in the methodology since
unit roots and lags may change. Another recommendation is the use of another
functional form which may yield more meaning results.
BIBLIOGRAPHY
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Blostrom, M., Lipsey, R & Zejan, M. (1993). Is fixed investment the key to economic
growth? Retrieved on April 23, 2015, from http://www.nber.org/papers/w4436.pdf
De Long, J. & Summers, L. (1991). Equipment investment and economic growth.

Retrieved on April 22, 2015, from
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Gujarati, D. & Porter, D. Basic econometrics 5th ed. McGraw Hill, New York
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http://ijmtpublication.com/files/IJMT_volume%2019_2_15.pdf
Pettinger, T. (n.d.). Fixed capital formation. Retrieved on April 24, 2015, from
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The Impact of Gross Fixed Capital Formation Growth on the

Economic Growth of the Philippines: A Time Series Approach

In Partial Fulfillment of the Requirements in ECOMET2

THEORETICAL FRAMEWORK ...................................................................................................................... 11

Breusch-Godfrey Test for Autocorrelation .................................................................................................. 26

Test for Autocorrelation ............................................................................................................................. 42

Statement of the Problem

Significance of the Study

REVIEW OF RELATED LITERATURE

investments, and level of capital accumulation. By holding the population,

year, 1961 to 2013

In using dynamic models in econometrics, it is essential to ensure that the data

Description of the Variables Used

product It is the annual percentage

capital It is the annual percentage

construction spending, etc.

More fixed capital formation

transferring of goods will be

The model will be written as:

. tsline gdpgr gfcfgr

Dickey-Fuller Unit Root Test

---------- Interpolated Dickey-Fuller --------Test

---------- Interpolated Dickey-Fuller --------Test

Phillips-Perron Unit Root Test for GDP Growth

---------- Interpolated Dickey-Fuller --------Test

---------- Interpolated Dickey-Fuller --------Test

Test for Lag Structure

Hendrys Top-Down Approach

Bayesian/Schwartz Criterion Information (SBIC) and Hannan-Quinn Information Criterion

Alt and Tinbergen (Ad Hoc Estimation) Method

Test for Cointegration

Augmented Engle-Granger Test

Test for Causality

Variance Inflation Factor Test for Multicollinearity

Breusch-Pagan Test for Heteroscedasticity

Breusch-Godfrey Test for Autocorrelation

Final Static Model

. prais gdpgr gfcfgr, robust

Prais-Winsten AR(1) regression -- iterated estimates

Durbin-Watson statistic (original)

Final Static Model

Test for Multicollinearity

Test for Heteroscedasticity

Test for Autocorrelation

Prais-Winsten Robust Regression for Corrective Measures

Prais-Winsten AR(1) regression -- iterated estimates

-----------------------------------------------------------------------------Durbin-Watson statistic (original)

Final General Distributed Lag Model

Koyck Infinite Distributed Lag Model

Test for Multicollinearity

Test for Heteroscedasticity

Test for Autocorrelation

Final Koyck Infinite Distributed Lag Model Using OLS

. ivreg gdpgr gfcfgr (l1.gdpgr=gfcfgr l1.gfcfgr), first

Test for Autocorrelation

The d-statistic is equal to 1.447762. Because it is closer to 2 than 0, then there is

has the best linear unbiased estimates (BLUE)

Test for Multicollinearity

Test for Heteroscedasticity

Test for Autocorrelation

Prais-Winsten Robust Regression for Corrective Measures

Prais-Winsten AR(1) regression -- iterated estimates

Final Almon Polynomial Distributed Lag Model

Autoregressive Distributed Lag Model (ARDL)