ECONOMETRICS PRESENTATION

GROUP MEMBER MAYA EVARINA BINTI PAILIN CHRISSY PAULUS CHARLOVIE CHARLES

The RELATIONSHIP Between ECONOMIC GROWTH on MONEY and INFLATION

Introduction
The view that low inflation is an important requirement for sustained economic growth became widely accepted after the great depression in the 1930s. Thus, low inflation is always considered as an objective of economic policy, it has been shown that volatility reduces economic growth and is therefore worthy of our attention (Klomp and Haan, 2009). Furthermore, it is likely that inflation and money disproportionately affects the economic growth.

Literature Review
Erbaykal and Okuyan (2008) examined the relationship between the inflation and the economic growth . (2001), and the existence of a cointegration relationship between the two series was detected following the test result. Whereas no statistically significant long term relationship was found with the formed ARDL models, a negative and statistically significant short term relationship has been found.Whereas no causality relationship was found from economic growth to inflation, a causality relationship was found from inflation to economic growth.

 Asogu (1998) examined the influence of money supply and government expenditure on Gross Domestic Product. The model assumed the irrelevance of anticipated monetary policy for short run deviations of domestic output from its natural level. The result indicated that unanticipated growth in money supply would have positive effect on output. A clear examination of the above shows that there is no general agreement on the determinant of economic growth.

Theoretical Framework
A macroeconomic policy that seeks to expand the money supply to encourage economic growth or reduce inflation (price increases). One form of expansionary policy is fiscal policy, which comes in the form of tax cuts, rebates and increased government spending. Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy.

Data and Methodology

The Data that we use for this analysis is time series data from 1972-2005. Multiple Regression Model Park Test Testing Hypothesis for Individual Partial Regression Coefficient White Test Joint Hypothesis That B2=B3=0 or R2=0 Jarque-Bera (JB) Test Ramsey RESET Test Breusch-Godfrey Serial Correlation LM Test Durbin-Watson Test

MULTIPLE REGRESSION MODEL

Dependent Variable: GROWTH Method: Least Squares Date: 12/16/11 Time: 00:07 Sample: 1972 2005 Included observations: 34 Variable C INFLATION MONEY Coefficient 6.728047 -0.289302 0.133137 Std. Error 1.870676 0.176432 0.074553 t-Statistic 3.596586 -1.639738 1.785811 Prob. 0.0011 0.1112 0.0839

Y = 6.728047 - 0.176432X2 + 0.133137X3 Se = (1.870676) (0.176432) T = (3.596586) (-1.639738) P = (0.0011) R2 = 0.154716 (0.1112) (0.074553) (1.785811) (0.0839)

Growth = 6.728047- 0.289302Inflation + 0.133137Money These results shows that both the slope coefficient are positive. The positive coefficient of Inflation suggest that 1% increase in inflation leads, on average, would reduce growth by 0.289 (when money is constant). On the other hand, an increase in money supply, on average, leads to increase the rate of growth by 0.133.

Testing Hypothesis for Individual Partial Regression Coefficient(Inflation)

Dependent Variable: GROWTH Method: Least Squares Date: 12/16/11 Time: 09:29 Sample: 1972 2005 Included observations: 34 Variable C INFLATION Coefficient 5.229015 0.024543 Std. Error 1.728007 0.016093 t-Statistic 3.026038 1.525065 Prob. 0.0049 0.1371

Ho: B3 = 0 H1: B3 > 0 Decision rule: Ho is rejected if the calculated p-value is less than alpha at 5% significant level, Ho is rejected. Result : Since the calculated p-value is 0.1371 > 0.05 at significant level, Ho is not rejected. Conclusion : The result shows there is no relationship between growth and money

Testing Hypothesis for Individual Partial Regression Coefficient(Money

Dependent Variable: GROWTH Method: Least Squares Date: 12/15/11 Time: 22:43 Sample: 1972 2005 Included observations: 34 Variable C MONEY Coefficient 5.136888 0.011367 Std. Error 1.640971 0.006750 t-Statistic 3.130395 1.683943 Prob. 0.0037 0.1019

Ho: B2 = 0 (There is no relationship between Growth and Money) H1: B2 > 0 (There is a positive relationship between Growth and Money) Decision rule: Ho is rejected if the calculated p-value is less than alpha at 5% significant level, Ho is rejected. Result : Since the calculated p-value is 0.1019 > 0.05 at significant level, Ho is not rejected. Conclusion : The result shows there is no relationship between Growth and Money.

Testing The Joint Hypothesis That B2=B3=0 or R2=0

= R2 /(K 1) 1 R2 /(n k)

Where n=the number of observation and k=the number of explanatory variable including the intercept. Ho: R2=0 (There is no difference in y on X2 and X3) Ho: R2 0 (There is a difference in y on X2 and X3) Decision rule: If the calculated F value is greater than critical value, Ho is rejected. Result: = 0.154716/(3 1) 1 0.154716 /(34 3) 0.077358 0.995009161

= 0.078

Degree of freedom in the numerator, k-1 = 3-1=2 Degree of freedom in the denominator, n-k = 34-3=31 The larger the R2, the larger the F value. But, E-view found that F value is smaller according to weak R2. Since, the computed F value is 0.078 which is less than the critical value of 3.23, d.f.(2,31) thus the null hypothesis is not rejected. Conclusion: The result shows that there is no difference in economic growth on Money and Inflation.

Test multicollinearity of pairwise between money and inflation, and between inflation and money

a)Regress lnmoney (lnx3) on the remaining lninflation(lnx2) and obtain the coefficient of determination , says lnX3 = 0.401680 + 1.087049lnX2 t = (4.535156) (55.38782) se = (0.088570) (0.019626) R2 = 0.989677 b)Regress lninflation (lnX2) on the remaining lnmoney (lnX3) and obtain the coefficient of determination , says . lnX2 = -0.319295 + l0.910425nX3 t = (-3.660873) (55.38782) se = (0.0009) (0.0000) R2 = 0.989677

 Ho: VIF < 10, There is no serious multicollinearity problem H1: VIF > 10, There is serious multicollinearity problem Decision rule, if VIF is greater than 10, there is serious multicollinearity problem.

Result : VIF = 96.87

Since, the computed VIF is 96.87 which is greater than 10, there is serious multicollinearity problem. Conclusion: The result shows that this regression suffer multicollinearity and coefficient of money and inflation turned out to be statistically significant.

 There is considerable variability in the data, raising the possibility that our regression suffers from heteroscedacity
SS1 on INFLATION
240
240

SS1 on MONEY

200

200

160
SS1

160
SS1

120

120

80

80

40

40

0 40 80 120 160 200 240

0 100

200

300 MONEY

400

500

INFLATION

Park Test
Dependent Variable: SS1 Method: Least Squares Date: 12/16/11 Time: 00:14 Sample: 1972 2005 Included observations: 34 Variable C GROWTHF Coefficient 56.43030 -5.444487 Std. Error 28.05353 3.594874 t-Statistic 2.011522 -1.514514 Prob. 0.0528 0.1397

Ho: No Heteroscedasticity problem H1: There is a heteroscedasticity problem Decision rule: Ho is rejected if the calculated p-value is less than alpha at 5% significant level, Ho is rejected. Result: Since the calculated p-value is 0.1397>0.05 at 5% significant level, Ho is not rejected. Conclusion: This model is having heteroscedasticity problem.

Park Test
240

200

160

SS1

120

80

40

0 5 6 7 8 GROWTHF 9 10 11

Jarque-Bera (JB) Test

12 10

Series: Residuals Sample 1972 2005 Observations 34 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability
-5 0 5 10 15

-2.61e-15 0.394169 14.10516 -7.379794 3.918817 1.018792 6.442133 22.66671 0.000012

Ho: The error term is normally distributed H1: The error term is not normally distributed

Decision rule: Ho is rejected if the calculated p-value is less than alpha at 5% significant level, Ho is rejected.

Result: Since the calculated p-value is 0.000012<0.05 at 5% significant level, Ho is rejected. Conclusion: The regress error term is not normally distributed.

White Test
Heteroskedasticity Test: White F-statistic Obs*R-squared Scaled explained SS 1.176781 5.904066 13.35537 Prob. F(5,28) Prob. Chi-Square(5) Prob. Chi-Square(5) 0.3453 0.3157 0.0203

Ho: The variance of distribution or error term is constant (homocedasticity) H1: The variance of distribution or error term is not constant (heteroscedasticity

Decision rule: Ho is rejected if the calculated p-value is less than alpha at 5% significant level, Ho is rejected. Result: Since, we obtain n.R25.90 with 2 d.f. This chi-square value has a probability of about 0.3157> 0.05 at significant level, Ho is not rejected.

Conclusion: This model shows that the variance of error term is constant.

RAMSEY RESET Test

Ramsey RESET Test: F-statistic Log likelihood ratio 0.347534 0.391608 Prob. F(1,30) Prob. Chi-Square(1) 0.5599 0.5315

Ho: No misspecification error H1: There is misspecification error Decision rule: Ho is rejected if the calculated p-value is less than alpha at 5% significant level, Ho is rejected. Result: Since, the calculated probability chi-square is 0.5315 which is greater than 5% at significant level, Ho is not rejected. Conclusion: This model shows no misspecification error.

Breusch-Godfrey Correlation LM Tests

Breusch-Godfrey Serial Correlation LM Test:
F-statistic Obs*R-squared 1.070540 2.337643 Prob. F(2,29) Prob. Chi-Square(2) 0.3560 0.3107

Ho: No autocorrelation in the distribution or error term H1:There is autocorrelation in the distribution error term Decision rule: Ho is rejected if the calculated p-value is less than alpha at 5% significant level, Ho is rejected. Result: Since, the calculated probability chi-square is 0.3107 which is greater than 5% at significant level, Ho is not rejected. Conclusion: The result shows there is no autocorrelation in the error term

Dependent Variable: GROWTH Method: Least Squares Date: 12/16/11 Time: 00:07 Sample: 1972 2005 Included observations: 34 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic)

Durbin-Watson d Tests
0.154716 0.100181 4.043255 506.7851 -94.17326 2.837026 0.073883 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat 7.626956 4.262394 5.716074 5.850753 5.762004 2.344978

Reject H0 Evidence of positive autocorrelation

Zone of indecision

Zone of indecision

Reject H0
Evidence of negative autocorrelation

Accept 0 or 0 or both

1.321

1.577

2.423

2.679

~ = 2.344978 N = 33 = 2 =1.577 = 1.321 Decision rule: d test Null hypothesis No positive autocorrelation No positive autocorrelation No negative autocorrelation No negative autocorrelation No positive or negative autocorrelation Decision Reject No decision Reject No decision Do not reject If 0<d<1.321 1.321 1.577 2.679 < < 4 2.423 2.679 1.577<d<2.679

Result & Discussion

By using the normality test, The regress error term is not normally distributed and there is also no error of measurement. The white test shows that the variance of distribution or error term is constant (homocedasticity) Breusch-Godfrey shows there is no autocorrelation in the error term. Durbin Watson shows no positive and negative autocorrelation.