5/21/2017 AQuickExplanationofRecentNARDLHassan

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AQuickExplanationofRecentNARDL
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TheNewsofapositivechangeinthecharacterofavillain(didsomethingverygood)ofyourareamaysurpriseyou,
buthisnegativechangemaynot.Thesetwosidesofchangesdonothaveanuniformimpactonyou.Again,thinkofa
verymoralpersonyoulike.Hisnegativechangemayshockyoubuthispositivechangewont.Thesetwochangesin
oppositedirections(positiveandnegative)donothavethesamepowertomoveyou,inbothexamples.Andtheeffects
arenotreallysymmetricorequivalenttheyareasymmetricornonequivalent.Asymmetryisonetypeofnonlinearity.
Theasymmetriesandotherotherformsofnonlinearityarealsofrequentineconomicvariables.Forexample,an
increase(positivechange)inoilpriceissaidtohavestrongereffectonparticularmacroeconomicvariablesthan
decrease(negativechange).Infact,nonlinearityisendemicwithinthesocialsciencesandthatasymmetryis
fundamentaltothehumanconditionShinetal.(2014)

Aconventionaltimeseriesregressionmodelcontainsconstantparametersandassumesthatachangeinexplanatory
variablehasthesameeffectovertimewhichmaynotbeappropriateinallcasesasshownintheoilexampleearlier.
Again,thepopularcointegrationtecniquessuchasEGECM,VECM,Boundtestingetc.implyaconstantspeedof
adjustment(i.eaconstantECT)tolongrunequilibriumafterashock(change).Butthisdosnotholdtruealwayswhen
thereismarketfrictions.(seeGDufrnot,VMignon2012).Estimatingarelationshipwhichpossiblyhasasymmetrywith
symmetrictechniquesseemsunfairandmayleadsonetosomeseriousinappropriatepolicyconclusions(Enders
2014)).Sincetheconventionacointerationtestdoesntallowonetocapturetheasymmetriesinmacroeconomic
variables.Varioustechniqueshavebeenintroducedsofartoaccountthisasymmetry,ThresholdECM,Smooth
transitionregressionECM.MarkovswitchingECMetc.ButtherecentNARDLorNonlinearAutoregressiveModel
proposedbyshinetal(2014)incorporateasymmetriesbothinthelongrunandinshortrunrelationships,andatthe
sametime,itcapturestheasymmetriesinthedynamicadjustment.Moreover,itallowstheregressorsofmixedorder
ofI(0)andI(1).

Anillustration:Ifinflationraterisesinacountryyoumayexpectthatthedomesticfoodsbecomesexpensiveandthere
willbeatendencytoimportfoodsfromforeigncountries.Therelationshipispositive.Againifinflationratefallsthe
consumersfinddomesticfoodscheaperandpeoplereducebuyingforeignfoods,thefoodimportsdecline(positive
relationship).Althoughinbothcasesthefoodimportsreactpositivelytotheinflationrate,arethemagnitudesof
reactionssameinbothcases?maybenotmaybefoodimportresponsemoretopositivechangeorotherwise.Atime
seriesregressionspecificationwithaconstantparameterwilltellusthatthereactionissameinbothdirection.Here
comestheNARDL.NARDL(alsootherasymmetricregressiontechniques)explicitlydistinguishesthereactionsofboth
directions.
IdenotefoodimportbyfoodtandinflationratebyINFt,interceptbyCandresidualsbyUt.Forsimplicity,ignorethe
otherregressorsthatmayinfluencethefoodimport.ThesimpleOLStwovariablemodeltakesthefollowingform:
Foodt=C+INFt+Ut.

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5/21/2017 AQuickExplanationofRecentNARDLHassan

TocapturethepossibleasymmetriceffectsofinflationonfoodimportNARDLtechniquedecomposestheinflationrate

seriesintotwoparts1)partialsumofpositivechangeininflationratedenotedbyINFt+and2)partialsumofpositive

changeininflationratedenotedbyINFtandincludebothofthemasseparateregressorsinthemodelandthemodel

becomes:

Foodt=C+1INFt++2INFt+Ut.

Clearly,thisisnowathreevariableOLSmodel.
Ifwenowrepresentthisequationin(linear)ARDLmodelproposedbypesaranet.Al(2001)thefinalmodeltakesthe
formasshowinpicturebelow.ThemodelshowninthepictureisthegeneralformofNARDL.(Nonlinear
AutoregressiveDistributedLagModel.Seetheexplanationofeachterminthepicturebelow.

Thelongruncoefficients:WecancalculatethelongruncoefficientofINF+tbydividingthethenegativeofthe
coefficientofINF+t,+bythecoefficientofFoodt1,,andthethelongruncoefficientofINFtbydividingthe

negativeofthecoefficientofINFt,bythecoefficientofFoodt1,

(+/)and(/)arethelongruncoefficientsofofINFt+andINFt,respectively.
ThesummationnotationimpliesthatNARDLconsiderinclusionofdifferencedvariablesintomodeluptosomelags.
Forexample,incaseofFoodt1,NARDLconsiderstheincusionofitsfirstlaggedtermuptomaximumlagyou

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5/21/2017 AQuickExplanationofRecentNARDLHassan

choose,ifappropriate.AndincaseofINFtitconsiderthetheinclusionofitszerolag(INFtitself)uptothe
maximumlagyouchoose,ifappropriate.

AsymmetricCointegrationtest:Alongrunrelationshiporcointegrationispresentifthejointnullhypothesis,
=+==zeroisrejected.ThecriticalvaluearethesamecriticalvaluesforARDL.

TestingSymmetry:Clearly,ifthelongruncoefficients(+/)and(/)arenotsamethenthereis
asymmetryinthelongrun.Sowetestthenullhypothesisof(+/)=(/).Ifthenullisrejectedthenthere
isanevidenceoflongrunasymmetryinthemodel.

ToestimateNARDL,followthesesteps:

Steps:
F




Step1.PerformunitrootteststojustifythatnonofthevariablesareI(2).

Step2.GenerateINFt+andINFtfromINFt

Step3.RuntheNonlinearECMunderNARDL
Step4.TestthenonlinearcointegrationtestwithFtest
Step5.checktheasymmetries.

SeemyanotherpostonestimatingNonlinearARDL(NARDL)withEviews.

NARDLWithEviews

Shinetal.(2104):

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5/21/2017 AQuickExplanationofRecentNARDLHassan

Researchgatelink
https://www.researchgate.net/publication/228275564_Modelling_Asymmetric_Cointegration_and_Dynamic_
Multipliers_in_a_Nonlinear_ARDL_Framework

SomepaperswhichappliedNARDL:

1.Abdlaziz,RizgarAbdlkarim,KhalidAbdulRahim,andPeterAdamu."OilandFoodPricesCo
integrationNexusforIndonesia:ANonlinearARDLAnalysis."InternationalJournalofEnergy
EconomicsandPolicy6.1(2016).
2.Ndoricimpa,Arcade."Analysisofasymmetriesinthenexusamongenergyuse,pollutionemissions
andrealoutputinSouthAfrica."Energy(2017).
3.Zhang,Zan,SuLingTsai,andTsangyaoChang."NewEvidenceofInterestRatePassthroughinTaiwan:A
NonlinearAutoregressiveDistributedLagModel."GlobalEconomicReview(2017):114.

References:

1.Dufrnot, Gilles, and Valrie Mignon. Recent developments in nonlinear cointegration with
applications to macroeconomics and finance. Springer Science & Business Media, 2012. link
2.
Enders, Walter. Applied Econometric Time Series. Hoboken: Wiley, 2015. Print.

3.Pesaran, M. Hashem, Yongcheol Shin, and Richard J. Smith. "Bounds testing approaches to the
analysis of level relationships." Journal of applied econometrics 16.3 (2001): 289326.link
4.Shin, Y., Yu, B., GreenwoodNimmo, M.J., 2014. Modelling Asymmetric Cointegration
andDynamic Multipliers in a Nonlinear ARDL Framework. In William C. Horrace andRobin C.
Sickles (Eds.), Festschrift in Honor of Peter Schmidt: Econometric Methodsand Application, pp.
281314. New York (NY): Springer Science & Business Media. link

Eviews official website:

http://www.eviews.com/home.html

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