Econometrics Methods (HUL315)

Assignment 4
Submitted by: Vishal Kumar Saw (2020ME10985)

Investment is a critical component in determining the long-term productive capacity

of an economy. It encompasses the purchase or construction of capital goods, such
as buildings, equipment, and software, as well as additions to inventory stocks. Under-
standing the key determinants of investment is essential for policymakers and economists
alike.
In the context of India, data on real investment (It ), real GDP (Yt ), nominal interest rate
(proxied by call money rate, it ), and inflation (measured by the change in the log of the
Consumer Price Index, CPI).
The investment equation to be estimated is given by:

ln It = β0 + β1 ln it + β2 ∆ ln CP It + β3 ln Yt + β4 t + ut (1)

Where:

• It : Real investment

• it : Nominal interest rate

• ∆ ln CP It : Change in the log of the Consumer Price Index

• Yt : Real GDP

• t: Time trend

• β0 , β1 , β2 , β3 , β4 : Coefficients to be estimated

• ut : Error term

Additionally, we will test the hypothesis that investors primarily focus on the real interest
rate, i.e., β1 = −β2 .
To test the relationship between the real interest rate and inflation, we formulate the
following hypotheses:
H0 : β1 = −β2
H1 : β1 ̸= −β2
Python Code:
1 import pandas as pd
2 import numpy as np
3 import statsmodels . api as sm
4

5 # Load data from Excel file

6 df = pd . read_csv ( " H U L 3 1 5_ A s s i g n m e n t 4 _ d a t a . csv " )
7

8 # Prepare variables
9 df [ ’ del_ln_CPI_t ’] = df [ ’ Delta_CPI ’]
10 df [ ’ ln_I_t ’] = np . log ( df [ ’ I_t ’ ])
11 df [ ’ ln_i_t ’] = np . log ( df [ ’ i_t ’ ])

1
 12 df [ ’ ln_Y_t ’] = np . log ( df [ ’ Y_t ’ ])
13

14 # Drop the first row since it has NaN value for Delta_ln_CPI
15 df = df . dropna ()
16

17 # Estimation
18 X = df [[ ’ ln_i_t ’ , ’ ln_CPI ’ , ’ ln_Y_t ’ , ’t ’ ]]
19 X = sm . add_constant ( X )
20 y = df [ ’ ln_I_t ’]
21 model = sm . OLS (y , X ) . fit ()
22

23 # Print regression results

24 print ( model . summary () )
25

26 # Hypothesis test : $ \ beta_ {1} = -\ beta_ {2} $

27 hypotheses = ’ ln_i_t + del_ln_CPI_t =0 ’
28 t_test = model . t_test ( hypotheses )
29 print ( t_test )

Summary:

2
Result of test

From above summary table we can conclude that we reject the null hypotheses that
mean investors do not primarily focus on the real interest rate, implying that the coef-
ficient of the nominal interest rate (β1 ) in the investment equation is not equal to the
negative of coefficient of inflation (β2 )