LILONGWE UNIVERSITY OF AGRICULTURE AND NATURAL RESOURCES

(LUANAR)

BUNDA CAMPUS

TO : PROFESSOR A. EDRISS

FROM : STOCKER SHONGA MSISKA

ID NUMBER : 200100559

PROGRAM : BSc IN DEVELOPMENT ECONOMICS

COURSE : ECONOMETRICS II

TOPIC : TIME SERIES ANALYSIS

YEAR : 3 SECOND SEMESTER

1
 Source SS df MS Number of obs = 29
F(1, 27) = 1700.68
Model 57.736659 1 57.736659 Prob > F = 0.0000
Residual .916629294 27 .033949233 R-squared = 0.9844
Adj R-squared = 0.9838
Total 58.6532882
a) Estimate the parameters of this model28 2.09476029
using the data given in the table. Root MSE = .18425

. ln_imports Coefficient Std. err. t P>|t| [95% conf. interval]

. regres ln_imports ln_gdp ln_wpi

Sourceln_gdp SS1.292438 df .03134 MS 41.24Number

0.000
of obs 1.228134
= 1.356742
29
_cons -6.328246 .4321946 -14.64F(2,0.000
26) -7.215036
= -5.441456
1111.73
Model 57.9753536 2 28.9876768 Prob > F = 0.0000
Residual
. .677934627 26 .026074409 R-squared = 0.9884
. regres
. regres ln_imports ln_wpi
ln_imports ln_gdp ln_wpi Adj R-squared = 0.9876
Total 58.6532882 28 2.09476029 Root MSE = .16148
Source
Source SS SS df MS
Number
MS of obs Number
df = of29obs = 29
F(2, 26) = 1111.73
ln_imports Model
Coefficient F(1, 27) = 833.15
57.9753536 Std. err. t
2 28.9876768 P>|t|
Prob > F [95%
= conf. interval]
0.0000
Model
Residual
56.8121586
.677934627
1
26 .026074409
56.8121586
R-squared
Prob
=
> F
0.9884
= 0.0000
Residual2.35684
ln_gdp 1.84112963.352867 27
6.68 .068189986
0.000
Adj R-squared R-squared
1.631511
= 0.9876 =
3.082168 0.9686
ln_wpi Total
-2.031125
58.6532882 .6713091 -3.03 Root
28 2.09476029 0.006
MSE -3.411021
Adj .16148 -.6512294
= R-squared = 0.9674
_cons Total
-11.63406 1.794069
58.6532882 -6.48 0.000
28 2.09476029 -15.32182
Root MSE -7.946301
= .26113

ln_imports Coefficient Std. err. t P>|t| [95% conf. interval]

. estat vif
ln_imports Coefficient Std. err. t P>|t| [95% conf. interval]
ln_gdp 2.35684 .352867 6.68 0.000 1.631511 3.082168
Variable ln_wpi VIF
-2.031125 1/VIF
.6713091 -3.03 0.006 -3.411021 -.6512294
b) Do you suspect
_cons that
ln_wpi there is1.794069
2.439024
-11.63406 multicollinearity
.0844998
-6.48 in the
28.86
0.000 data?
0.000 -7.946301
-15.32182 2.265645 2.612403
ln_gdp _cons165.06 0.006058
.2393985 .3910345 0.61 0.546 -.5629381 1.041735
ln_wpi 165.06 0.006058
. estat vif
Mean VIF 165.06
. regres ln_gdp ln_wpi
Variable VIF 1/VIF

Source
ln_gdp 165.06 SS 0.006058 df MS Number of obs = 29
ln_wpi 165.06 0.006058 F(1, 27) = 4429.60
Model 34.3552408 1 34.3552408 Prob > F = 0.0000
Residual
Mean VIF .20940756
165.06 27 .007755836 R-squared = 0.9939
Adj R-squared = 0.9937
Total 34.5646484 28 1.23445173 Root MSE = .08807
 Yes, I suspect multicollinearity as seen below in the two tests.
ln_gdp Coefficient Std. err. t P>|t| [95% conf. interval]
For ln_gdp and ln_wpi, both have VIF values of approximately 165.06. These VIF values
ln_wpi 1.896671 .0284977 66.56 0.000 1.838198 1.955143
indicate severe_cons
multicollinearity
5.037873between ln_gdp and
.131877 ln_wpi,
38.20 as they 4.767284
0.000 far exceed the commonly
5.308462

. pwcorr ln_imports ln_gdp ln_wpi, sig

ln_imp~s ln_gdp ln_wpi

ln_imports 1.0000

ln_gdp 0.9922 1.0000

0.0000

ln_wpi 0.9842 0.9970 1.0000

0.0000 0.0000

accepted threshold of 10. The high VIF values suggest that there is severe multicollinearity
between the natural logarithms of GDP (ln_gdp) and the wholesale price index (ln_wpi).

2
The correlation between ln_imports and ln_gdp is 0.9922, indicating a very strong positive linear
relationship between the natural logarithms of imports and GDP. The correlation between
ln_imports and ln_wpi is 0.9842, indicating a very strong positive linear relationship between the
natural logarithms of imports and the wholesale price index (WPI). The correlation between
ln_gdp and ln_wpi is 0.9970, indicating a very strong positive linear relationship between the
natural logarithms of GDP and the wholesale price index (WPI). These high correlations suggest
strong multicollinearity between the independent variables

This multicollinearity can lead to inflated standard errors and imprecise estimates of the
regression coefficients for these variables.

c) Regress the following

1) In Importst = A1 + A2 In GDPt
. .regres
regresln_imports
ln_importsln_gdp
ln_gdp

Source
Source SS
SS df
df MS
MS Number of
Number of obs
obs == 29
29
F(1, 27)
F(1, 27) == 1700.68
1700.68
Model
Model 57.736659
57.736659 11 57.736659
57.736659 Prob >> FF
Prob == 0.0000
0.0000
Residual
Residual .916629294
.916629294 27 .033949233
27 .033949233 R-squared
R-squared == 0.9844
0.9844
Adj R-squared
Adj R-squared == 0.9838
0.9838
Total
Total 58.6532882
58.6532882 28 2.09476029
28 2.09476029 Root MSE
Root MSE == .18425
.18425

ln_imports
ln_imports Coefficient Std.
Coefficient Std. err.
err. tt P>|t|
P>|t| [95% conf.
[95% conf. interval]

ln_gdp
ln_gdp 1.292438
1.292438 .03134
.03134 41.24
41.24 0.000
0.000 1.228134
1.228134 1.356742
_cons
_cons -6.328246
-6.328246 .4321946
.4321946 -14.64
-14.64 0.000
0.000 -7.215036
-7.215036 -5.441456

2). .regres
Inregres ln_imports
ln_imports
Imports ln_wpi
ln_wpi
t = B1 + B 2 In CPIt

Source
Source SS
SS df
df MS
MS Number of
Number of obs
obs == 29
F(1, 27)
F(1, 27) == 833.15
Model
Model 56.8121586
56.8121586 11 56.8121586
56.8121586 Prob >> FF
Prob == 0.0000
Residual
Residual 1.84112963
1.84112963 27 .068189986
27 .068189986 R-squared
R-squared == 0.9686
Adj R-squared
Adj R-squared == 0.9674
Total
Total 58.6532882
58.6532882 28
28 2.09476029
2.09476029 Root
Root MSE
MSE == .26113

ln_imports
ln_imports Coefficient
Coefficient Std.
Std. err.
err. tt P>|t|
P>|t| [95%
[95% conf.
conf. interval]

ln_wpi
ln_wpi 2.439024
2.439024 .0844998
.0844998 28.86
28.86 0.000
0.000 2.265645
2.265645 2.612403
_cons
_cons .2393985
.2393985 .3910345
.3910345 0.61
0.61 0.546
0.546 -.5629381
-.5629381 1.041735

. .regres
regresln_gdp
ln_gdpln_wpi
ln_wpi

Source
Source SS
SS df 3
df MS
MS Number
Number ofof obs
obs == 29
F(1,
F(1, 27)
27) == 4429.60
4429.60
Model
Model 34.3552408
34.3552408 11 34.3552408
34.3552408 Prob
Prob >> FF == 0.0000
0.0000
Residual .20940756 27 .007755836 R-squared = 0.9939
 Total 58.6532882 28 2.09476029 Root MSE = .26113

ln_imports Coefficient Std. err. t P>|t| [95% conf. interval]

ln_wpi 2.439024 .0844998 28.86 0.000 2.265645 2.612403

3) In_cons
GDPt = C1.2393985
+ C2 In CPI.3910345
t 0.61 0.546 -.5629381 1.041735

. regres ln_gdp ln_wpi

Source SS df MS Number of obs = 29

F(1, 27) = 4429.60
Model 34.3552408 1 34.3552408 Prob > F = 0.0000
Residual .20940756 27 .007755836 R-squared = 0.9939
Adj R-squared = 0.9937
Total 34.5646484 28 1.23445173 Root MSE = .08807

ln_gdp Coefficient Std. err. t P>|t| [95% conf. interval]

ln_wpi 1.896671 .0284977 66.56 0.000 1.838198 1.955143

_cons 5.037873 .131877 38.20 0.000 4.767284 5.308462

. pwcorr ln_imports ln_gdp ln_wpi, sig

 Based on these regressions, what can you say about the nature of multicollinearity in the
ln_imp~s ln_gdp ln_wpi
data?
ln_imports 1.0000
Based on the results of the regression analysis and the assessment of multicollinearity using
both the pairwise correlations
ln_gdp 0.9922 and VIF values, we can infer the nature of multicollinearity in
1.0000
0.0000
the data:
ln_wpi 0.9842 0.9970 1.0000
1. Pairwise Correlations
0.0000 0.0000

The pairwise correlations between the natural logarithms of the variables (`ln_imports`,
`ln_gdp`, and `ln_wpi`) are very high, close to 1. High correlations between pairs of
independent variables suggest strong multicollinearity in the data. Specifically, the
correlations between `ln_imports` and `ln_gdp`, `ln_imports` and `ln_wpi`, and `ln_gdp`
and `ln_wpi` are all close to 1.
2. Variance Inflation Factors (VIF)
The VIF values for `ln_gdp` and `ln_wpi` are both approximately 165.06. VIF values
exceeding the commonly accepted threshold of 10 indicate severe multicollinearity. The
high VIF values confirm the presence of multicollinearity between `ln_gdp` and `ln_wpi`.

Conclusion

The nature of multicollinearity in the data is severe, as indicated by both the pairwise
correlations and the VIF values. There is strong multicollinearity between the natural logarithms
of GDP (`ln_gdp`) and the wholesale price index (`ln_wpi`). This multicollinearity can lead to
unreliable estimates of the regression coefficients and inflated standard errors. It's essential to

4
address multicollinearity before interpreting the regression results or making any conclusions
based on the model.