Econometric S

EVIEWS
QUESTION NO.i
Plot the GDP and GE series. Do they look stationary or non-stationary?
GDP GE
7E+15 6E+14
6E+15 5E+14
5E+15
4E+14
4E+15
3E+14
3E+15
2E+14
2E+15
1E+14
1E+15
0E+00 0E+00
1975 1980 1985 1990 1995 2000 2005 1975 1980 1985 1990 1995 2000 2005
Both of the graphs show a trend hence, series for both variables is non-stationary.
QUESTION NO. ii
Take the first difference of the given series and plot them again. Do the data look stationary or
non-stationary?
DGE
DGDP
6E+13
4E+14
4E+13
2E+14
2E+13
0E+00
0E+00
-2E+14
-2E+13
-4E+14
-4E+13
-6E+14 -6E+13
1975 1980 1985 1990 1995 2000 2005 1975 1980 1985 1990 1995 2000 2005
Even after taking the first difference, the graphs suggest that the series are still non-stationary.
QUESTION NO. iii

Plot the Correlogram at level and at first difference of GDP and GE. How many lags are
appropriate here?
Correlogram for GDP Correlogram for GE
AC shows a slow decay: non-stationary series AC shows a slow decay: non-stationary

PAC also shows decay but it is not still hence non PAC also shows decay but it is not still
Stationary. hence non-stationary.
Appropriate no. of lags = 10 ;(1/4th of data) Appropriate no. of lags = 10 ;(1/4th of
data)
QUESTION NO. iii

Use the unit root tests (such as DF, ADF and PP tests) to demonstrate that the series is
stationary? Apply these tests without intercept, with intercept and with intercept & trend both at
level and the first difference of the given GDP and GE series.
Dicky-Fuller unit root test at level without trend & intercept-GDP
Null Hypothesis: GDP has a unit root

Exogenous: None
Lag Length: 0 (Automatic - based on SIC, maxlag=0)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic 8.771031 1.0000

Test critical values: 1% level -2.619851
5% level -1.948686
10% level -1.612036
*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation
Dependent Variable: D(GDP)
Method: Least Squares
Date: 05/26/21 Time: 08:14
Sample (adjusted): 1972 2008
Included observations: 43 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
GDP(-1) 0.048949 0.005581 8.771031 0.0000
R-squared 0.211620 Mean dependent var 1.82E+14

Adjusted R-squared 0.211620 S.D. dependent var 1.66E+14
S.E. of regression 1.48E+14 Akaike info criterion 68.11108
Sum squared resid 9.14E+29 Schwarz criterion 68.15204
Log likelihood -1463.388 Hannan-Quinn criter. 68.12618
Durbin-Watson stat 1.335260
As the value of the tau statistic is positive, we can say that we do not reject null hypothesis and
the series is non stationary.
Dicky-Fuller unit root test at level with intercept-GDP

Exogenous: Constant
t-Statistic Prob.*

5% level -2.931404
10% level -2.603944

Date: 05/26/21 Time: 08:17

GDP(-1) 0.038200 0.010694 3.572238 0.0009
C 5.07E+13 4.31E+13 1.176437 0.2462

F-statistic 12.76089 Durbin-Watson stat 1.365867
Prob(F-statistic) 0.000922
As the value of the tau statistic is positive, we can say that we do not reject null hypothesis and
the series is non stationary
Dicky-Fuller unit root test at level with intercept & trend-GDP

Exogenous: Constant, Linear Trend
t-Statistic Prob.*

5% level -3.518090
10% level -3.189732

Date: 05/26/21 Time: 08:20
GDP(-1) 0.019030 0.055744 0.341377 0.7346

C 4.42E+13 4.74E+13 0.932787 0.3565
@TREND("1971") 3.30E+12 9.41E+12 0.350559 0.7278
Here when intercept and trend is taken into consideration, the tau statistic becomes negative
but it still is statistically insignificant as it is less than critical values at 1%, 5% and 10% in
absolute terms.
When we tested the series of GDP at level with intercept, without intercept and with intercept
& trend, we concluded that the series in all cases were non-stationary however, there was
improvement seen in the data after every time intercept and trend were added.
Dicky-Fuller unit root test at 1st difference with intercept-GDP
Null Hypothesis: D(GDP) has a unit root

Exogenous: Constant
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -3.612933 0.0096

5% level -2.933158
10% level -2.604867

Dependent Variable: D(GDP,2)
Date: 05/26/21 Time: 15:54
D(GDP(-1)) -0.511197 0.141491 -3.612933 0.0008

C 9.95E+13 3.38E+13 2.941477 0.0054

Series is stationary at first difference with intercept as test statistic in absolute terms is greater
than critical value at 5% hence, we reject the null hypothesis that the series is non-stationary.
Dicky-Fuller unit root test at 1st difference without intercept & trend-GDP
Exogenous: None
t-Statistic Prob.*

5% level -1.948886
10% level -1.611932

Date: 05/26/21 Time: 15:56
D(GDP(-1)) -0.204261 0.104094 -1.962280 0.0565

Dicky-Fuller unit root test at 1st difference with intercept & trend-GDP
t-Statistic Prob.*

5% level -3.520787
10% level -3.191277

Date: 05/26/21 Time: 15:57
D(GDP(-1)) -0.659970 0.152005 -4.341756 0.0001

C 2.75E+13 4.65E+13 0.590959 0.5580
@TREND("1971") 4.37E+12 2.03E+12 2.156366 0.0373

Here, when we applied first difference to GDP series, we see that either with or without
intercept and with trend, all three results depict the data to be stationary series.
Dicky-Fuller unit root test at level with intercept-GE
Null Hypothesis: GE has a unit root

Exogenous: Constant
t-Statistic
Elliott-Rothenberg-Stock DF-GLS test statistic 1.320640
5% level -1.950394
10% level -1.611202
*MacKinnon (1996)
DF-GLS Test Equation on GLS Detrended Residuals

Dependent Variable: D(GLSRESID)
Date: 05/20/21 Time: 20:09
GLSRESID(-1) 0.033433 0.025315 1.320640 0.1954

D(GLSRESID(-1)) 0.582071 0.160341 3.630206 0.0009

Adjusted R-squared -0.007404 S.D. dependent var 1.64E+13
With intercept, the test statistic is less than critical value hence we do not reject the null
hypothesis and the series is non stationary.
Dicky-Fuller unit root test at level with intercept & trend-GE

t-Statistic
Elliott-Rothenberg-Stock DF-GLS test statistic -1.448775

5% level -3.190000
10% level -2.890000
*Elliott-Rothenberg-Stock (1996, Table 1)

Warning: Test critical values calculated for 50 observations
and may not be accurate for a sample size of 36
Date: 05/20/21 Time: 20:10
GLSRESID(-1) -0.124621 0.086018 -1.448775 0.1566

D(GLSRESID(-1)) 0.479798 0.175004 2.741643 0.0097

With intercept, the test statistic is less than critical value hence we do not reject the null
hypothesis and the series is non stationary.
None of the 3 cases depict the series of GE to be stationary at level, hence, we do not reject H0
and series is non-stationary.
Dicky-Fuller unit root test at 1st difference with intercept-GE
Null Hypothesis: D(GE) has a unit root

Exogenous: Constant
t-Statistic

5% level -1.950394
10% level -1.611202
*MacKinnon (1996)

Date: 05/20/21 Time: 20:12
GLSRESID(-1) -0.599993 0.169884 -3.531788 0.0012

With intercept, GE at 1st difference is showing significant test statistic in absolute terms hence
we reject the H0 and conclude that the series is stationary.
Dicky-Fuller unit root test at 1st difference with intercept & trend-GE

t-Statistic

5% level -3.190000
10% level -2.890000
*Elliott-Rothenberg-Stock (1996, Table 1)

Warning: Test critical values calculated for 50 observations
and may not be accurate for a sample size of 36

Date: 05/20/21 Time: 20:14
GLSRESID(-1) -0.622263 0.163147 -3.814131 0.0005

With intercept and trend, the series shows a statistically significant test statistic hence we reject
the H0 and series is stationary.
None of the 3 cases depict the series of GE to be non-stationary at level, hence, we reject H0
and series is stationary at first difference.
.
AUGMENTED DICKY-FULLER UNIT ROOT TEST
GDP
1. AT LEVEL
a. Without intercept
Exogenous: None
t-Statistic Prob.*

5% level -1.950117
10% level -1.611339

Date: 05/20/21 Time: 20:18
GDP(-1) 0.045597 0.007906 5.767354 0.0000
R-squared -0.017440 Mean dependent var 1.50E+14

Do not reject H0; series non-stationary as test statistic is positive.

a. with intercept
Exogenous: Constant
t-Statistic Prob.*

5% level -2.943427
10% level -2.610263

Date: 05/20/21 Time: 20:23
GDP(-1) 0.022784 0.015873 1.435345 0.1601

C 8.53E+13 5.19E+13 1.645163 0.1089


b. with intercept and trend

t-Statistic Prob.*

5% level -3.540328
10% level -3.202445

Date: 05/20/21 Time: 20:24
GDP(-1) -0.242027 0.096001 -2.521089 0.0169

D(GDP(-1)) 0.440886 0.162668 2.710334 0.0107
C 5.20E+13 4.99E+13 1.040755 0.3058
@TREND("1971") 3.80E+13 1.42E+13 2.668346 0.0119

Do not reject H0; series non-stationary as test statistic is less than critical
value.
All three of the above tests suggested the series to be non-

stationary however, we saw that when we took intercept in the
model, the test statistic value became smaller than before and
when we took trend as well, the test statistic became negative.
2. At 1st difference
 Without intercept
Exogenous: None
t-Statistic Prob.*

5% level -1.950394
10% level -1.611202

Date: 05/20/21 Time: 20:26
D(GDP(-1)) -0.322775 0.126578 -2.550015 0.0153

The test statistic is greater than the critical value at 5% hence we reject the H0
and series is stationary.
 With intercept
Exogenous: Constant
t-Statistic Prob.*

5% level -2.945842
10% level -2.611531

Date: 05/20/21 Time: 20:27
D(GDP(-1)) -0.644949 0.159119 -4.053251 0.0003

C 1.00E+14 3.43E+13 2.924045 0.0061

The test statistic is greater than the critical value at 5% hence we reject the H0
and series is stationary.
 With intercept and trend

t-Statistic Prob.*
Augmented Dickey-Fuller test

statistic -4.184750 0.0113
Test critical
values: 1% level -4.234972
5% level -3.540328
10%
level -3.202445

Date: 05/20/21 Time: 20:28
Coefficie
Variable nt Std. Error t-Statistic Prob.
-
D(GDP(-1))
0.693420 0.165702 -4.184750 0.0002
5.75E+1
C 3 5.38E+13 1.069176 0.2927
@TREND("1971 2.57E+1
") 2 2.48E+12 1.035361 0.3080
Mean dependent 4.03E+1

R-squared 0.346995 var 2
Adjusted R- S.D. dependent 1.78E+1
squared 0.307419 var 4
S.E. of 1.48E+1 Akaike info 68.1798
regression 4 criterion 8
Sum squared 7.27E+2 68.3118
resid 9 Schwarz criterion 4
- Hannan-Quinn 68.2259
Log likelihood 1224.238 criter. 3
Durbin-Watson 1.82706
F-statistic 8.767799 stat 9
The test statistic is greater than the critical value at 5% hence we reject the H0 and
series is
Stationary.
As we can see that all three tests suggest the series of GDP to be
stationary at first difference.
GE
1. At Level

Exogenous: None
t-Statistic Prob.*

5% level -1.950394
10% level -1.611202

Dependent Variable: D(GE)
Date: 05/20/21 Time: 20:38
GE(-1) 0.034739 0.012733 2.728251 0.0100

D(GE(-1)) 0.358928 0.176917 2.028796 0.0504


 With intercept

Exogenous: Constant
t-Statistic Prob.*

5% level -2.945842
10% level -2.611531

Date: 05/20/21 Time: 20:39
GE(-1) 0.023877 0.024103 0.990620 0.3291

D(GE(-1)) 0.351231 0.179392 1.957899 0.0587
C 3.29E+12 6.18E+12 0.532945 0.5976



t-Statistic Prob.*

5% level -3.540328
10% level -3.202445

Date: 05/20/21 Time: 20:40
GE(-1) -0.086063 0.098565 -0.873158 0.3891

D(GE(-1)) 0.424073 0.189426 2.238724 0.0323
C 5.89E+12 6.55E+12 0.899341 0.3752
@TREND("1971") 1.19E+12 1.03E+12 1.149974 0.2587
Do not reject H0; series non-stationary as test statistic is less than critical values.
All 3 tests conducted above depicts that the series is non-stationary at level however we can
observe a slight improvement in test statistic by each step.
2. At 1st Difference
Exogenous: None
t-Statistic Prob.*

5% level -1.950394
10% level -1.611202

Dependent Variable: D(GE,2)
Date: 05/20/21 Time: 20:40
D(GE(-1)) -0.321898 0.144416 -2.228970 0.0323

The test statistic is greater than the critical value at 5% hence we reject the H0 and series is
stationary
 With intercept

Exogenous: Constant
t-Statistic Prob.*

5% level -2.945842
10% level -2.611531

Date: 05/20/21 Time: 20:41
D(GE(-1)) -0.598327 0.171967 -3.479325 0.0014

C 8.47E+12 3.30E+12 2.567671 0.0148

stationary

t-Statistic Prob.*

5% level -3.540328
10% level -3.202445

Date: 05/20/21 Time: 20:41
D(GE(-1)) -0.640339 0.173843 -3.683441 0.0008

C 2.87E+12 5.55E+12 0.518185 0.6078
@TREND("1971") 3.13E+11 2.50E+11 1.249880 0.2201

stationary
All of the above tests show that the GE series is stationary at 1st difference whether or not
intercept and trend included.
PHILIPS-PERRON TEST
GDP
1. AT LEVEL

Exogenous: None
Bandwidth: 1 (Newey-West automatic) using Bartlett kernel
Adj. t-Stat Prob.*

Phillips-Perron test statistic 4.942048 1.0000
5% level -1.950117
10% level -1.611339
2.40E+2
Residual variance (no correction) 8
3.22E+2
HAC corrected variance (Bartlett kernel) 8
Phillips-Perron Test Equation

Date: 05/20/21 Time: 20:46
GDP(-1) 0.045597 0.007906 5.767354 0.0000

The test statistic is positive hence we do not reject the H0, the series is non-stationary.
 With intercept

Exogenous: Constant
Adj. t-Stat Prob.*

5% level -2.943427
10% level -2.610263
2.23E+2
2.91E+2

Date: 05/20/21 Time: 20:46
GDP(-1) 0.022784 0.015873 1.435345 0.1601

C 8.53E+13 5.19E+13 1.645163 0.1089

The test statistic is positive hence we do not reject the H0, the series is non-stationary.

Adj. t-Stat Prob.*
Phillips-Perron test statistic -1.620119 0.7655

5% level -3.536601
10% level -3.200320
2.02E+2
2.02E+2

Date: 05/20/21 Time: 20:47
GDP(-1) -0.152361 0.094043 -1.620119 0.1144

C 8.29E+13 5.01E+13 1.656119 0.1069
@TREND("1971") 2.64E+13 1.40E+13 1.887613 0.0676

The test statistic is less than 5% critical value hence we do not reject the H0, the series is non-
stationary.
All three of the above tests suggested the series to be non-stationary however, we saw that
when we took intercept in the model, the test statistic value became smaller than before and
when we took trend as well, the test statistic became negative.
2. 1st Difference

Exogenous: None
Adj. t-Stat Prob.*

5% level -1.950394
10% level -1.611202
2.61E+2
2.61E+2

Date: 05/20/21 Time: 20:49
D(GDP(-1)) -0.322775 0.126578 -2.550015 0.0153

The test statistic is greater than 5% critical value hence we reject H0, series is stationary.
 With intercept

Exogenous: Constant
Adj. t-Stat Prob.*

5% level -2.945842
10% level -2.611531
2.09E+2
1.85E+2

Date: 05/20/21 Time: 20:49
D(GDP(-1)) -0.644949 0.159119 -4.053251 0.0003

C 1.00E+14 3.43E+13 2.924045 0.0061


Adj. t-Stat Prob.*

5% level -3.540328
10% level -3.202445
Residual variance (no correction) 2.02E+2

8
1.62E+2

Date: 05/20/21 Time: 20:49
D(GDP(-1)) -0.693420 0.165702 -4.184750 0.0002

C 5.75E+13 5.38E+13 1.069176 0.2927
@TREND("1971") 2.57E+12 2.48E+12 1.035361 0.3080

GE
1. At Level

Exogenous: None
Adj. t-Stat Prob.*

5% level -1.950117
10% level -1.611339
2.40E+2
4.20E+2

Date: 05/20/21 Time: 20:53
GE(-1) 0.051849 0.009825 5.277403 0.0000


 With intercept

Exogenous: Constant
Adj. t-Stat Prob.*

5% level -2.943427
10% level -2.610263

2.37E+2
4.09E+2

Date: 05/20/21 Time: 20:53
GE(-1) 0.038080 0.022814 1.669111 0.1040

C 4.02E+12 6.00E+12 0.669910 0.5073



Adj. t-Stat Prob.*

5% level -3.536601
10% level -3.200320
2.36E+2
HAC corrected variance (Bartlett kernel) 4.16E+2
6

Date: 05/20/21 Time: 20:53
GE(-1) -0.000114 0.094732 -0.001206 0.9990

C 5.07E+12 6.58E+12 0.770891 0.4461
@TREND("1971") 4.21E+11 1.01E+12 0.415713 0.6802

Do not reject H0; series non-stationary as test statistic is less than 5% critical value.
2. At 1st difference

Exogenous: None
Adj. t-Stat Prob.*

5% level -1.950394
10% level -1.611202
2.69E+2
2.46E+2
Date: 05/20/21 Time: 20:55
D(GE(-1)) -0.321898 0.144416 -2.228970 0.0323

Reject H0 as series is stationary; test statistic greater than 5% critical value.

 With intercept

Exogenous: Constant
Adj. t-Stat Prob.*

5% level -2.945842
10% level -2.611531
2.25E+2
2.42E+2

Date: 05/20/21 Time: 20:55
D(GE(-1)) -0.598327 0.171967 -3.479325 0.0014

C 8.47E+12 3.30E+12 2.567671 0.0148



Adj. t-Stat Prob.*

5% level -3.540328
10% level -3.202445
2.15E+2
2.33E+2

Date: 05/20/21 Time: 20:54
D(GE(-1)) -0.640339 0.173843 -3.683441 0.0008

C 2.87E+12 5.55E+12 0.518185 0.6078
@TREND("1971") 3.13E+11 2.50E+11 1.249880 0.2201


QUESTION NO. v
Write the appropriate equations of DF and ADF tests without intercept, with intercept and with
intercept & trend.
1. DICKEY FULLER
 GDP
GDPt= 0.0455972 GDPt-1
GDPt= 36.187 + 0.0227839 GDPt-1
GDPt= 35.535 + 20.1763 t - 0.1523608 GDPt-1
 GE
GEt = 0.051849 GEt-1
GEt = 22.9275 + 0.0380796 GEt-1
GEt = 25.7817 + 22.4440 t - 0.0001142 GEt-1
 DGDP
DGDPt = - 0.3228 DGDPt-1
DGDPt = 16.7183 - 0.6450 DGDPt-1
DGDPt = 28.6301 + 18.9860 t - 0.6934 DGDPt-1
 DGE
DGEt = - 0.3219 DGEt-1
DGEt = 35.0238 - 0.5983 DGEt-1
DGEt = 19.8014 + 19.5082 t - 0.6403 DGEt-1
2. AUGMENTED DICKEY FULLER

 GDP
GDPt= 0.0456 GDPt-1
GDPt= 36.1869 + 0.0227 GDPt-1
GDPt=-27.1351 + 23.3295t - 0.2420 GDPt-1 + 0.4409ΔGDPt-1
 GE
GEt = 0.0347 GEt-1 + 0.3590 ΔGEt-1
GEt = 20.9431 + 0.0239 GEt-1 + 0.3512 ΔGEt-1
GEt = 28.0107 + 15.2348t - 0.0861 GEt-1+ 0.4241 ΔGEt-1
 DGDP
DGDPt = - 0.3228 DGDPt-1
DGDPt = 16.7183 - 0.6450 DGDPt-1
DGDPt = 28.6301 + 18.9860 t - 0.6934 DGDPt-1
 DGE
DGEt = - 0.3219 DGEt-1
DGEt = 35.0238 - 0.5983 DGEt-1
DGEt = 19.8014 + 19.5082 t - 0.6403 DGEt-1
QUESTION NO. vi
What do you conclude about the order of integration of each of these series?
according to the unit root tests that we applied on our series, the series appeared to be stationary
at first difference hence our order of integration of both of the series is I(1).
QUESTION NO. vii

Perform the Engle-Granger (EG) and Cointegration Regression Durbin-Watson (CRDW) tests of
cointegration. Do your results support the theory that there is long-run relationship between GDP
and GE?
Engle-Granger (EG) constant trend
Date: 05/26/21 Time: 16:37

Series: GE GDP
Null hypothesis: Series are not cointegrated
Cointegrating equation deterministics: C
Automatic lags specification based on Schwarz criterion
(maxlag=9)
Dependent tau-statistic Prob.* z-statistic Prob.*

GE -2.838431 0.1798 -880.6194 0.0000
GDP -2.740069 0.2106 -93.86152 0.0000
*MacKinnon (1996) p-values.
Intermediate Results:
GE GDP
Rho - 1 -0.207661 -0.185643
Rho S.E. 0.073161 0.067751
Residual variance 1.24E+26 2.21E+28
Long-run residual variance 1.93E+30 4.88E+30
Number of lags 3 3
Number of observations 34 34
Number of stochastic trends** 2 2
**Number of stochastic trends in asymptotic distribution

As p-value is greater than 5% we do not reject the null hypothesis
that is series are not cointegrated i.e. no long run relationship
between GDP and GE.
Engle-Granger (EG) linear trend
Date: 05/26/21 Time: 16:42

Series: GE GDP
Null hypothesis: Series are not cointegrated
Cointegrating equation deterministics: C @TREND
Automatic lags specification based on Schwarz criterion
(maxlag=8)
Dependent tau-statistic Prob.* z-statistic Prob.*

GE -2.625509 0.4862 158.3589 1.0000
GDP -2.530349 0.5329 -12.53852 0.4165
*MacKinnon (1996) p-values.

Intermediate Results:
GE GDP
Rho - 1 -0.218420 -0.208690
Rho S.E. 0.083192 0.082475
Residual variance 1.32E+26 1.39E+28
Long-run residual variance 6.02E+28 3.88E+28
Number of lags 3 1
Number of observations 34 36
Number of stochastic trends** 2 2
**Number of stochastic trends in asymptotic distribution
As p-value is greater than 5% we do not reject the null hypothesis that is series are not
cointegrated i.e. no long run relationship between GDP and GE.
QUSTION NO. viii

If the variables are not cointegrated, what should you do if you are interested in testing the
relationship between GDP and GE?
If the variables are not cointegrated i.e. there is no long run relationship in variables, we apply
error correction mechanism to the series to look for any short run fluctuations.
QUSTION NO. ix
Employ the Error Correction Mechanism (ECM) to study the short behavior of GDP in relation
to GE and vice versa. How much time it is required for the series to be on the long-run
equilibrium path if there are some short-run fluctuations?
WHEN GDP IS DEPENDENT

ERROR CORRECTION MECHANISM
Step1: we will run regression with and without trend and then generate its residuals.
Step2: then we will regress the equation again by adding lagged error term in the regression. The
results of the regression are following;
Without trend
Dependent Variable: DGDP
Date: 05/26/21 Time: 18:37
DGE 5.855796 1.307239 4.479515 0.0001

U1(-1) 0.272942 0.173411 1.573964 0.1250
C 7.42E+13 2.73E+13 2.715801 0.0104

As p-value is insignificant hence we conclude that there are no short run adjustments.
With trend
Dependent Variable: DGDP

Date: 05/26/21 Time: 18:43
DGE 5.680844 1.381224 4.112905 0.0003

U2(-1) 0.263371 0.180710 1.457428 0.1547
@TREND 1.27E+12 2.13E+12 0.596801 0.5548
C 5.16E+13 4.57E+13 1.129126 0.2672

the series still don’t have any short run adjustments as p-value is still insignificant.
WHEN GE IS DEPENDENT
ERROR CORRECTION MECHANISM
Step1: we will run regression with and without trend and then generate its residuals.
Step2: then we will regress the equation again by adding lagged error term in the regression. The
results of the regression are following;
Without trend
Dependent Variable: DGE

Date: 05/26/21 Time: 18:46
DGDP 0.054658 0.014671 3.725623 0.0007

R1(-1) 0.330280 0.194778 1.695671 0.0994
C 5.23E+12 3.18E+12 1.646513 0.1092

With trend
Dependent Variable: DGE

Date: 05/26/21 Time: 18:48
DGDP 0.050487 0.015331 3.293179 0.0024

R2(-1) 0.336224 0.196579 1.710374 0.0969
@TREND 2.69E+11 2.23E+11 1.204686 0.2372
C 6.04E+11 4.79E+12 0.126089 0.9005

QUSTION NO. x
Determine whether GE Granger-cause GDP or GDP Granger-cause GE. Use up to five lags and
comment on your results. What important conclusion do you draw from this exercise in the light
of two distinct approaches?
Pairwise Granger Causality Tests

Date: 05/26/21 Time: 18:52
Sample: 1971 2014
Lags: 5
Null Hypothesis: Obs F-Statistic Prob.
GE does not Granger Cause GDP 33 1.23306 0.3273

GDP does not Granger Cause GE 3.25292 0.0239
As in the last column we can see that p-value is less than 5% hence we conclude to reject the
null hypothesis that GDP does not Granger Cause GE and this conclusion supports the
Wagner’s law approach which states that national income causes public expenditure.
QUSTION NO. xi
An Autoregressive (AR) model contains only lagged dependent variables on the right hand side
(there are no other independent variables). The partial autocorrelation function helps determine
how many lagged terms should be used in the model. Apply the AR(p) model on the GDP and
GE series.
GDP as Dependent Variable
Dependent Variable: GDP
Date: 05/26/21 Time: 19:27
C 8.53E+13 5.19E+13 1.645163 0.1089

GDP(-1) 1.022784 0.015873 64.43353 0.0000

GE as Dependent Variable
Dependent Variable: GE
Date: 05/26/21 Time: 19:31
C 4.02E+12 6.00E+12 0.669910 0.5073

GE(-1) 1.038080 0.022814 45.50122 0.0000

QUSTION NO. xii

A moving average (MA) model uses only lagged error terms as the independent variables (there
are no other independent variables). The optimal number of lagged error terms for a moving
average model can be determined by its autocorrelation function. Apply the MA(q) model on the
GDP and GE series.
When GDP is Dependent
Dependent Variable: GDP

Date: 05/26/21 Time: 19:37
C 2.99E+15 2.63E+14 11.35576 0.0000

U(-1) 1.232037 0.647577 1.902532 0.0654

When GE is Dependent
Dependent Variable: GE
Date: 05/26/21 Time: 19:39
C 2.51E+14 2.00E+13 12.57557 0.0000

R(-1) 0.659738 0.683170 0.965700 0.3408

QUSTION NO. xiii
Now identify the underlying ARIMA (p, d, q) model only for the GDP variable based on the
Box-Jenkins three step approach.
Step 1: Identification
We will be estimating AR (1) and MA (1) model at first difference.
Step 2: Estimation

Date: 05/26/21 Time: 19:46
Convergence achieved after 8 iterations
MA Backcast: 1972
AR(1) 0.552641 0.213270 2.591273 0.0140

MA(1) 0.210049 0.247846 0.847495 0.4026

Inverted AR Roots .55

Inverted MA Roots -.21
Step 3: Diagnostic Checking
As the error terms appear to be purely random, hence, there is no need to re-conduct ARIMA
model.

Econometric S

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Econometric S

Uploaded by

Copyright:

Available Formats

EVIEWS

QUESTION NO. iii

AC shows a slow decay: non-stationary series AC shows a slow decay: non-stationary

QUESTION NO. iii

Null Hypothesis: GDP has a unit root

Augmented Dickey-Fuller test statistic 8.771031 1.0000

*MacKinnon (1996) one-sided p-values.

Variable Coefficient Std. Error t-Statistic Prob.

GDP(-1) 0.048949 0.005581 8.771031 0.0000

R-squared 0.211620 Mean dependent var 1.82E+14

Dicky-Fuller unit root test at level with intercept-GDP

Null Hypothesis: GDP has a unit root

Augmented Dickey-Fuller test statistic 3.572238 1.0000

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Variable Coefficient Std. Error t-Statistic Prob.

R-squared 0.237364 Mean dependent var 1.82E+14

Dicky-Fuller unit root test at level with intercept & trend-GDP

Null Hypothesis: GDP has a unit root

Augmented Dickey-Fuller test statistic 0.341377 0.9983

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Variable Coefficient Std. Error t-Statistic Prob.

GDP(-1) 0.019030 0.055744 0.341377 0.7346

Dicky-Fuller unit root test at 1st difference with intercept-GDP

Null Hypothesis: D(GDP) has a unit root

Augmented Dickey-Fuller test statistic -3.612933 0.0096

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Variable Coefficient Std. Error t-Statistic Prob.

D(GDP(-1)) -0.511197 0.141491 -3.612933 0.0008

R-squared 0.246041 Mean dependent var 9.37E+12

Augmented Dickey-Fuller test statistic -1.962280 0.0486

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Variable Coefficient Std. Error t-Statistic Prob.

D(GDP(-1)) -0.204261 0.104094 -1.962280 0.0565

R-squared 0.082954 Mean dependent var 9.37E+12

Augmented Dickey-Fuller test statistic -4.341756 0.0068

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Variable Coefficient Std. Error t-Statistic Prob.

D(GDP(-1)) -0.659970 0.152005 -4.341756 0.0001

R-squared 0.326358 Mean dependent var 9.37E+12

Dicky-Fuller unit root test at level with intercept-GE

Null Hypothesis: GE has a unit root

DF-GLS Test Equation on GLS Detrended Residuals

Variable Coefficient Std. Error t-Statistic Prob.

GLSRESID(-1) 0.033433 0.025315 1.320640 0.1954

R-squared 0.021379 Mean dependent var 1.33E+13

Null Hypothesis: GE has a unit root

Elliott-Rothenberg-Stock DF-GLS test statistic -1.448775

*Elliott-Rothenberg-Stock (1996, Table 1)

Variable Coefficient Std. Error t-Statistic Prob.

GLSRESID(-1) -0.124621 0.086018 -1.448775 0.1566

R-squared 0.177328 Mean dependent var 2.07E+12

Dicky-Fuller unit root test at 1st difference with intercept-GE

Null Hypothesis: D(GE) has a unit root

Elliott-Rothenberg-Stock DF-GLS test statistic -3.531788

DF-GLS Test Equation on GLS Detrended Residuals

Variable Coefficient Std. Error t-Statistic Prob.

GLSRESID(-1) -0.599993 0.169884 -3.531788 0.0012