UNIVERSITY EXAMINATIONS

Jan/Feb 2023

ECS4863

ADVANCED ECONOMETRICS

100 Marks
Duration: 4 Hours

FIRST EXAMINER: DR SJ JOUBERT

SECOND EXAMINER: DR E NDOU
EXTERNAL EXAMINER: PROF AM PRETORIUS

This paper consists of 7 pages.

Answer all FIVE questions.

CONFIDENTIAL
INSTRUCTIONS:

The paper will be available from 08:00 on 31 January 2023. The official examination time is 08:00 to
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STUDENTS ARE ALLOWED TO USE NON-PROGRAMMABLE CALCULATORS.

[TURN OVER]
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ECS4863

Date: 31 January 2023

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QUESTIONS SECTION

QUESTION 1: [10]

(a) Choose any two of the below terms or concepts and explain them in your own words (3 marks
each): (6)

i. Trend stationarity
ii. Integrated stochastic process
iii. Random walk with a drift
iv. Asymptotic normality

(b) Choose any one of the below graphs (Y or Z) and discuss the suitability of a variable that display
this shape, in time series modelling. In your discussion, include your view on the expected order
of integration, and possible examples of actual time series data which could have a similar trend.
(4)
Y Z
1,000
400,000,000

800
300,000,000

600
200,000,000
400

100,000,000
200

0
0

-200 -100,000,000
2500 5000 7500 10000 2500 5000 7500 10000

Question 2 [45]

In this question you need to analyse the trend and drivers of producer prices in South Africa. Statistics
South Africa notes that:

‘The Producer Price Index (PPI) measures changes in the prices of locally produced commodities. A
sample of producers is surveyed each month and the results of this survey are used to compile the
producer price indices for final manufactured goods, intermediate manufactured goods, electricity and
water, mining, and agriculture, forestry and fishing. The PPI can be used as an economic indicator of
inflation, as an escalator in contracts and as a deflator in the calculation of the national accounts’

According to theory, the drivers of producer price inflation can include supply and demand dynamics,
the supply of raw materials as well as changes in exchange rates and commodity prices.

You are given the following data, where::

PPI = PPI for final manufactured goods (Index)

CPI = Headline consumer inflation, all urban areas (Index)
ZAR_DOL = Exchange rates: SA cent per: USA - Dollar (monthly averages)
ZAR_EUR = Exchange rates: SA cent per: EU - Euro (monthly averages)
OIL = Brent crude oil - US Dollar (USD/barrel)
MAIZE = Primary Commodity Prices: Maize (corn) (USD/ton)

The data is available in the MS EXCEL file “DATASET # ECS4863 JanFeb 2023 data.xls”.
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DATASETS: For questions 2 and 5, you must use the correct dataset, depending on the first letter of
your surname.

DATASET 1: Students whose surname start with A-K;

DATASET 2: Students whose surname start with L-O;
DATASET 3: Students whose surname start with P-Z.

Please make sure to download the correct datafile (Excel file), depending on your surname. The Excel
files are clearly marked ‘DATASET 1’, ‘DATASET 2’ and ‘DATASET 3’. A mark of zero will be allocated
for students not adhering to thus rule.

Please complete the following before answering this question:

My Surname is:
DATASET used: (indicate number)

(a) Evaluate the developments in PPI versus CPI during the period. Use the month-on-same-
month of previous year method to calculate the inflation rates. Do you find potential
evidence of a flow-through effect between the two? (5)

(b) Test the variables PPI and OIL for stationarity (transform all applicable variables). Also
comment on their respective orders of integration. (5)

(c) In this question you need to build a long run equation and test it for possible cointegration.

(i) Estimate the following long-run equation: (3)

LPPIt = 𝛃𝛃𝟎𝟎 + 𝛃𝛃𝟏𝟏LZAR_DOLt + 𝛃𝛃𝟐𝟐LOILt + 𝜇𝜇𝑡𝑡

Copy/paste your ‘EViews Estimation output’ window (include all information).

(ii) Comment on the signs of the estimated coefficients. (2)

(iii) Generate the residual series: [use the first three letters of your surname as suffix, e.g.
res_JOU]. Demonstrate, how you can use the residual series to test if cointegration
exists between the variables in the long run model. Provide all details of the test(s)
you perform and their criteria.

Copy/paste your ‘EViews Estimation output’ window (include all information). (4)

(d) In this question you need to build a short run (Error Correction Model)

(i) Estimate the ECM using the equation below. (3)

D(LPPI)t = 𝛃𝛃𝟎𝟎 + 𝛃𝛃𝟏𝟏D(LZAR_DOL)t + 𝛃𝛃𝟐𝟐D(LMAIZE)t − 1 +

𝛃𝛃𝟑𝟑D(LOIL)t + 𝛃𝛃𝟒𝟒(RESIDUAL)t − 1

Copy/paste your ‘EViews Estimation output’ window (include all information).

(ii) Evaluate the ECM statistically. (3)

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(iii) Comment on the inclusion of both maize and oil prices in the ECM. Does this make sense
according to economic theory? (3)

(e) Perform diagnostic checks on the ECM. Test only for the potential problems as indicated
below. In each instance, provide the name and a brief description of the test you perform.
Also, clearly indicate how you have drawn your conclusions based on the results. (4)

(i) Normality
(ii) Serial correlation

(f) Create a model statement in EViews to combine your long-run and ECM. Provide your
model statement (2 marks), and a copy of the graph depicting the actual and modelled
values (2 marks), in the space provided. (4)

(g) Critically evaluate the overall model and its performance. (4)

(h) Choose any one of the explanatory variables and apply a temporary shock to it. Use the
first three letters of your name to label your shocked variable, e.g. OIL_FAN. Post a graph
depicting both the original and shocked variable. (You may choose the start/end dates,
size and direction of the shock). Comment on how you expect the shocked variable to
influence the results of your model (you do not have to re-run the model). (5)

QUESTION 3: [20]

(a) State the problems of using the linear probability model and briefly explain how some of the
problems can be remedied. (4)

(b) A financial insurance company would like to introduce a new product offering to the market.
The company asks you to estimate a model that determines the probability of a household
to own durable goods, from a sample of 100 000 households. As an econometrician, you
estimate a parsimonious logit model to determine the ownership of durable goods as a
function of worker wages. Durable goods ownership is a binary variable: Y = 1 if a
household owns a durable goods, zero otherwise. The estimated logit model is given by 𝐿𝐿𝑖𝑖
and where logIncome represents the logarithm of income while CR denotes a head of
household`s credit record rating.

𝐿𝐿𝑖𝑖 = 0.77231 + 0.347582 logIncome - 1,2444CR

se = (0.8275) (0.0858) (0.605)

CR =1 if the household head has a bad credit rating assessment and zero otherwise

i. Interpret the estimated logit model and determine the significance of the estimated
coefficients. (6)

ii. What is the probability that a household would own durable goods? (4)

iii. What is the rate of change of probability at the income level of R20 000? (4)

iv. Explain how you will determine the joint significance of all estimated coefficients in the
estimated model. (2)
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QUESTION 4: [8]

(a) Differentiate between the within and between estimators in panel data analysis. (4)

(b) Discuss the potential disadvantage of using the fixed effects least square dummy variable
model. (4)

QUESTION 5: [17]

Suppose you are one of the consultants for an economic development consulting agency, and you are
required to estimate an economic growth model for a panel of G7 countries on annual data. Please use
the appropriate dataset according to your surname, as indicated below. The agency wants you to
determine the drivers of economic growth of G7 economies. The economic growth model you are
required to estimate is as follows:

𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ𝑖𝑖𝑖𝑖 = 𝛽𝛽0 + 𝛽𝛽1Po𝑝𝑝𝑝𝑝𝑖𝑖𝑖𝑖 + 𝛽𝛽2𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖 + 𝛽𝛽3Im𝑝𝑝𝑝𝑝𝑖𝑖𝑖𝑖 + 𝛽𝛽4Inf𝑖𝑖𝑖𝑖 + 𝑢𝑢𝑖𝑖𝑖𝑖

Where:
Growth: annual GDP (constant prices) growth rate
Popg: annual population growth rate
Expg: annual Volume of Exports of goods and services growth rate
Impg: annual Volume of Exports of goods and services growth rate
Inf: annual consumer price inflation

The data is available in the MS EXCEL file “Dataset # ECS4863 JanFeb 2023 data.xls”. (i.e. the same
Excel File you downloaded for Question 2, but go to the Q5 sheet)

DATASETS: For questions 5, you must again use the correct dataset, depending on the first letter of
your surname.

DATASET 1: Students whose surname start with A-K;

DATASET 2: Students whose surname start with L-O;
DATASET 3: Students whose surname start with P-Z.

Please make sure to use the correct datafile (Excel file), depending on your surname. The Excel files
are clearly marked ‘DATASET 1’, ‘DATASET 2’ and ‘DATASET 3’. A mark of zero will be allocated for
students not adhering to thus rule.

Please complete the following before answering this question:

My Surname is:
DATASET used: (indicate number)
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Jan/Feb 2023
(a) Draw a scatterplot depicting the relationship between inflation and GDP growth. Comment
on the relationship. [Inflation should be indicated on the x-axis and GDP growth on the y-
axis]. (3)
(b) Estimate the economic growth model using fixed effects and interpret the results. (6)
(c) Estimate the economic growth model using random effects and interpret the results. (6)
(d) Which of the two models (fixed effects or random effects) would you prefer and use in your
presentation to the client of the agency? Explain your answer. (2)

[Total: 100 marks]

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UNISA 2023