FDP on Applied Econometrics

Presentation

Niharika
Banasthali Vidyapith
Objective : To find the relationship between
Financial Development and
Economic Growth in India in Post
Reform Era
Economic Growth = f(FINDEV, Fiscal Deficit,
Inflation, Trade openness
Model Specification :
GDP = β0 + β1FINDEX + β2 FD + β3INF + β4TRDO +
µ.....(1)
Time Series Data...Secondary data...(1989-2015)
 FINANCIAL DEVELOPMENT
Index : Principal Component Analysis
1.Stock market capitalisation to GDP
2.Private Credit to GDP
3.Broad Money to GDP
4. Bank Density
5. Ratio of Central Bank Assets to the sum of
Commercial Bank and Central
Bank Asset
6. Financial Interrelation Ratio (FIR)
7. New Issue Ratio (NIR)
8. Ratio of Broad Money to Narrow Money
(Innovation Ratio)
Steps for empirical estimation

1.Test of stationarity

2. ARDL Bound test approach

3.Causality
 Variable ADF-Test PP-Test

H0: Series has unit root H0: Series has unit root
Adjusted T-
T- Statistics P-Value Statistic P-Value

GDP (Constant) -4.77 0.0005* -4.78 0.0005

GDP(Constant & Trend) -5.22 0.0009* -5.82 0.0002

Δ GDP (Constant) -8.72 0.000 -22.138 0.0001

Δ GDP (Constant & Trend) -8.58 0.000 -22.32 0.000

FINDEX(Constant) 0.35 0.97 0.18 0.967

FINDEX (Constant & Trend) -2.40 0.36 -2.38 0.3814

Δ FINDEX (Constant) -6.90 0.000 -6.84 0.000

Δ FINDEX (Constant & Trend) -7.63 0.000 -7.74 0.000

Dependent Variable: GDP
Method: ARDL
Date: 09/14/17 Time: 22:11
Sample (adjusted): 1990 2015
Included observations: 26 after adjustments
Maximum dependent lags: 2 (Automatic selection)
Model selection method: Schwarz criterion (SIC)
Dynamic regressors (2 lags, automatic): FINDEX FD TRDOPN INF
Fixed regressors: C
Number of models evalulated: 162
Selected Model: ARDL(1, 1, 0, 0, 0)
Note: final equation sample is larger than selection sample
HAC standard errors & covariance (Bartlett kernel, Newey-West fixed
bandwidth = 3.0000)

Variable Coefficient Std. Error t-Statistic Prob.*

GDP(-1) -0.002603 0.213768 -0.012175 0.9904

FINDEX -0.626639 0.239775 -2.613448 0.0171
FINDEX(-1) 0.539518 0.152337 3.541613 0.0022
FD -0.352580 0.265353 -1.328718 0.1997
TRDOPN 0.154778 0.227436 0.680534 0.5044
INF -0.478817 0.226157 -2.117191 0.0477
C 16.63203 9.208146 1.806230 0.0867

R-squared 0.547576 Mean dependent var 6.518077

Adjusted R-squared 0.404705 S.D. dependent var 2.170902
S.E. of regression 1.674967 Akaike info criterion 4.094268
Sum squared resid 53.30480 Schwarz criterion 4.432987
Log likelihood -46.22549 Hannan-Quinn criter. 4.191807
F-statistic 3.832665 Durbin-Watson stat 1.589199
Prob(F-statistic) 0.011301

*Note: p-values and any subsequent tests do not account for model
selection.
 ARDL Bound Test
Serial Correlation Test
Heteroskedasticity Test
Stability Test (RAMSEY test & CUSUM test)
Normality Test
Estimation of Long Run Relationship (Bound test)
Short Run Relationship
Breusch-Godfrey Serial Correlation LM Test:

F-statistic 1.333083 Prob. F(2,17) 0.2899

Obs*R-squared 3.524851 Prob. Chi-Square(2) 0.1716
Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 1.205557 Prob. F(6,19) 0.3459

Obs*R-squared 7.169003 Prob. Chi-Square(6) 0.3055
Scaled explained SS 2.121944 Prob. Chi-Square(6) 0.9081
RAMSEY

Ramsey RESET Test

Equation: UNTITLED
Specification: GDP GDP(-1) FINDEX FINDEX(-1) FD TRDOPN INF C
Omitted Variables: Squares of fitted values

Value df Probability
t-statistic 1.802088 18 0.0883
F-statistic 3.247519 (1, 18) 0.0883

F-test summary:
Sum of Sq. df Mean Squares
Test SSR 8.147227 1 8.147227
Restricted SSR 53.30480 19 2.805516
Unrestricted SSR 45.15757 18 2.508754
15

10

-5

-10

-15
1998 2000 2002 2004 2006 2008 2010 2012 2014

CUSUM 5% Significance
6
Series: Residuals
Sample 1990 2015
5
Observations 26

4 Mean 5.93e-15
Median 0.230680
3 Maximum 2.034954
Minimum -3.050894
Std. Dev. 1.460203
2
Skewness -0.406417
Kurtosis 2.108523
1
Jarque-Bera 1.576715
0 Probability 0.454591
-3 -2 -1 0 1 2
ARDL Long Run Form and Bounds Test
Dependent Variable: D(GDP)
Selected Model: ARDL(1, 1, 0, 0, 0)
Case 3: Unrestricted Constant and No Trend
Date: 09/14/17 Time: 22:20
Sample: 1989 2015
Included observations: 26

Conditional Error Correction Regression

Variable Coefficient Std. Error t-Statistic Prob.

C 16.63203 7.305376 2.276684 0.0346

GDP(-1)* -1.002603 0.219463 -4.568445 0.0002
FINDEX(-1) -0.087121 0.122112 -0.713454 0.4842
FD** -0.352580 0.299520 -1.177150 0.2537
TRDOPN** 0.154778 0.170259 0.909078 0.3747
INF** -0.478817 0.172267 -2.779504 0.0119
D(FINDEX) -0.626639 0.239283 -2.618820 0.0169

* p-value incompatible with t-Bounds distribution.

** Variable interpreted as Z = Z(-1) + D(Z).

Levels Equation
Case 3: Unrestricted Constant and No Trend

Variable Coefficient Std. Error t-Statistic Prob.

FINDEX -0.086895 0.146688 -0.592380 0.5606

FD -0.351665 0.300316 -1.170983 0.2561
TRDOPN 0.154377 0.202330 0.762994 0.4548
INF -0.477574 0.188284 -2.536464 0.0201

EC = GDP - (-0.0869*FINDEX -0.3517*FD + 0.1544*TRDOPN -0.4776*INF )

F-Bounds Test Null Hypothesis: No levels relationship

Test Statistic Value Signif. I(0) I(1)

F-statistic 7.081129 10% 2.45 3.52

k 4 5% 2.86 4.01
2.5% 3.25 4.49
1% 3.74 5.06

t-Bounds Test Null Hypothesis: No levels relationship

Test Statistic Value Signif. I(0) I(1)

t-statistic -4.568445 10% -2.57 -3.66

5% -2.86 -3.99
2.5% -3.13 -4.26
1% -3.43 -4.6
ARDL Error Correction Regression
Dependent Variable: D(GDP)
Selected Model: ARDL(1, 1, 0, 0, 0)
Case 3: Unrestricted Constant and No Trend
Date: 09/14/17 Time: 22:17
Sample: 1989 2015
Included observations: 26

ECM Regression
Case 3: Unrestricted Constant and No Trend

Variable Coefficient Std. Error t-Statistic Prob.

C 16.63203 2.415872 6.884482 0.0000

D(FINDEX) -0.626639 0.149942 -4.179209 0.0005
CointEq(-1)* -1.002603 0.153146 -6.546714 0.0000

R-squared 0.699504 Mean dependent var 0.076154

Adjusted R-squared 0.673374 S.D. dependent var 2.663752
S.E. of regression 1.522367 Akaike info criterion 3.786576
Sum squared resid 53.30480 Schwarz criterion 3.931741
Log likelihood -46.22549 Hannan-Quinn criter. 3.828378
F-statistic 26.77007 Durbin-Watson stat 1.589199
Prob(F-statistic) 0.000001

* p-value incompatible with t-Bounds distribution.

Key points
Some variables are I(0) and some are I(1).
Serial Correlation does not exists
Homoskedasticity exists
Residuals are normally distributed
There exists cointegration among the variables
THANK YOU