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Our aim is to study the theory quantity of money in the long-run and for that we took the

data from the IMF analysing variables like M3 and IPC consumer index and we took the
percentage annual growth of money and prices. We decided to analyse yearly variables to
study stationarized variables.
To do this analysis, wee start by studying the relation between annual % change in money
and prices running the regression:
Prices t=beta1+ beta2 money t+ ut
Hence for each country we obtain the following results:

Bolívia

reg prices money

Source |

SS

df

MS

-------------+-----------------------------------------------------------

Number of obs =
F(

1,

54

52) = 5572.94

Model |

134755251

1

134755251

Prob > F

=

0.0000

Residual |

1257373.81

52

24180.2656

R squared
R-squared

=

0.9908

Adj R-squared
R
=

0.9906

-------------+----------------------------------------------------------Total |

136012625
6012625

53

2566275.94

Root MSE

=

155.5

-----------------------------------------------------------------------------prices |

Coef.

Std. Err.

t

P>|t|

[95% Conf. Interval]

-------------+---------------------------------------------------------------1.656262

.0221864

74.65

0.000

1.611742

1.700783

_cons |

-46.48212

21.57874

-2.15

0.036

-89.78302

-3.181215

1

money |

.2

Leverage
.4
.6

.8

1985

1984

0

1959
1961
1966
1965
1964
1963
1973
1972
1971
1970
1975
1977
1994
1993
1992
1991
1990
1989
1988
1987
1986
1997
1996
2008
2007
2006
2005
1962
1969
1968
1974
1976
1978
1981
1980
1983
1998
2003
2009
1958
1960
1967
1979
1995
1999
2001
2000
2002
2004
1957
1956
1982

0

.2

.4
.6
Normalized residual squared

.8

Conclusions for this especific country:
The regressor money is statistically significant since we obtain a p-value of 0.000
99% of the variation of the inflation is explained linearly by the variable annual% change in
money.

15000
10000
5000
0
0

2000

4000
money
prices

6000

8000

Fitted values

Take the observation of year 1985, 1984

Reggressing model with dummys for Hyperinflationary period
(1984-1985)
To see whether there is a structural change in the model during the hyperinflationary times
I will introduce a Dummy in the model:
Dummy=1 if t=hyperinflationary times (Bolivia case(1984,1985) t=29, t=30)
Dummy=0 if not

Model with dummy
Pricest=beta1+ beta2*moneyt+ beta3*dummyt+ beta4 dummy*money+ ut

If Dummy=1
Model: prices t=(beta1+beta3)+ (beta2+beta4)money t + u t
If dummy=0

Model: prices t= beta1 + beta2 money t + ut

Under H0: Beta3=beta4=0 (there is no structural change in the model)

Codes in stata:
generate obs=_n
. gen dummy=0
. replace dummy=1 if obs==29
(1 real change made)
. replace dummy=1 if obs==30
(1 real change made)
gen dmoney=money*dummy
reg prices money dummy dmoney

Source |

SS

df

MS

Number of obs =

-------------+-----------------------------Model |

135964266

3

45321422

Residual |

48358.6224

50

967.172447

F(

-------------+-----------------------------Total |

136012625

53

2566275.94

3,

54

50) =46859.71

Prob > F

=

0.0000

R-squared

=

0.9996

Adj R-squared =

0.9996

Root MSE

31.099

=

-----------------------------------------------------------------------------prices |

Coef.

Std. Err.

t

P>|t|

[95% Conf. Interval]

-------------+---------------------------------------------------------------money |

.9679052

.0822909

11.76

0.000

.802619

1.133191

dummy |

-1403.398

40.24342

-34.87

0.000

-1484.229

-1322.567

dmoney |

.9152123

.0826704

11.07

0.000

.749164

1.081261

_cons |

-6.038745

5.229494

-1.15

0.254

-16.54249

4.465003

By introducing the dummy variable we conclude that during hyperinflationary periods, a
unit change in annual % in money is reflected in a 1.99 percentual points in inflation,
reflecting that there is some exogenous shock, apart from changes in prices, that are
causing this change in the value of inflation. When the dummy takes the value zero
meaning that we are in non-hyperinflationary period, this relation is closer to one-to-one.
Notice R2 is almost 100% showing the introduction of the new variables increased the
explicative power of the model over inflation
Testing the structural change

The RSSE of the F-statistic corresponds to the SSE of the original model, since under H0
there is no structural change on the model (which corresponds to the original model)
The RSSE=1.257.373,81 and SSE=48.358,6224
RSSE  SSE
1 257 373,81  48 358,62
q
2
F  value   

625,03  0,052; 50  3,18
SSE
48358,62
N  2K
50

Since F-value> Fcritic, we reject the null hypothesis and then we conclude with a level of
significance of 5% that there is a statistically significant structural change in the model
during the hyperinflationary period

Argentina

Model
Prices t=beta1+ beta2*Money t+ ut
reg prices money

Regression with 49 observations

Source |

SS

df

MS

Number of obs =

-------------+------------------------------

F(

1,

49

47) =

755.31

Model |

13552690.4

1

13552690.4

Prob > F

=

0.0000

Residual |

843334.13

47

17943.2794

R-squared

=

0.9414

Adj R-squared =

0.9402

Root MSE

133.95

-------------+-----------------------------Total |

14396024.5

48

299917.178

=

-----------------------------------------------------------------------------prices |

Coef.

Std. Err.

t

P>|t|

[95% Conf. Interval]

-------------+---------------------------------------------------------------money |

1.468127

.0534197

27.48

0.000

1.36066

1.575593

_cons |

-37.97795

21.0049

-1.81

0.077

-80.23435

4.278448

-----------------------------------------------------------------------------Comments:
Relation of price and money=1.46
By P- value=0 we can see that we reject the null hypothesis (H0: beta2=0)
concluding with a level of significance of 5% that money is statistically
significant when explaining the evolution of prices
R2=0,94 = everything else constant, 94% of the variability of prices can be
explained by the aggregate variable M3.

Stata code for graphic:
summarize leverage

Variable |

Obs

Mean Std. Dev.

Min

Max

-------------+-------------------------------------------------------leverage |

49 200.0563

531.364 -66.45961 3243.579

0

1000

2000

3000

code: twoway( scatter prices money)(lfit prices money)

0

500

1000

1500
money

prices

lvr2plot, mlabel(year)

Fitted values

2000

2500

.8
.2

Leverage
.4

.6

1989

1990

0

1984
1985
1976
2001
1999
2000
2008
1995
1961
1971
2007
1969
1994
1997
1996
2005
2004
1965
1970
1998
2006
2009
2002
1962
1964
1963
1968
2003
1966
1993
1967
1974
1973
1992
1981
1980
1986
1972
197719831988
1975
1982
1991
1978
1987
1979

0

.2
.4
Normalized residual squared

.6

.

Reggressing model with dummys for Hyperinflationary period
(1989-1990)
To see whether there is a structural change in the model during the
hyperinflationary times I will introduce a Dummy in the model:
Dummy=1 if t=hyperinflationary times (Argentina case(1989,1990) t=29,
t=30)
Dummy=0 if not
Model with dummy
Pricest=beta1+ beta2*moneyt+ beta3*dummyt+ beta4 dummy*money+ ut

If Dummy=1
Model: prices t=(beta1+beta3)+ (beta2+beta4)money t + u t
If dummy=0
Model: prices t= beta1 + beta2 money t + ut

Under H0: Beta3=beta4=0 (there is no structural change in the model)

Stata codes
. gen obs=_n
. gen dummy=0
. replace dummy=1 if obs==29
(1 real change made)
. replace dummy=1 if obs==30
(1 real change made)
. gen dmoney=money*dummy

. reg prices money dummy dmoney

Source |

SS

df

MS

Number of obs =

-------------+------------------------------

F(

3,

49

45) = 2176.84

Model |

14297504.4

3

4765834.8

Prob > F

=

0.0000

Residual |

98520.1186

45

2189.33597

R-squared

=

0.9932

Adj R-squared =

0.9927

-------------+-----------------------------Total |

14396024.5

48

299917.178

Root MSE

=

46.79

-----------------------------------------------------------------------------prices |

Coef.

Std. Err.

t

P>|t|

[95% Conf. Interval]

-------------+---------------------------------------------------------------money |

1.045071

.0487685

21.43

0.000

.9468459

1.143295

dummy |

1582.43

102.8682

15.38

0.000

1375.243

1789.617

dmoney |

-.3712628

.075946

-4.89

0.000

-.5242259

-.2182996

_cons |

-8.715363

8.334931

-1.05

0.301

-25.50278

8.07205

------------------------------------------------------------------------------

By introducing the dummy variable we conclude that during hyperinflationary periods, a
unit change in annual % in money is reflected in a 0,6 percentual points in inflation,
reflecting that there is some exogenous shock apart from changes in prices which are
causing this change in the value of inflation. When the dummy takes the value zero, this
relation is closer to one-to-one (beta2=1,045)

Notice R2 is almost 100% showing the introduction of the new variables increased the
explicative power of the model over inflation

Testing the structural change

The RSSE=843.334,13 and SSE=98.520,1186
$%%&  %%&
843334,13  98520,1186
'
2 
  !"#   

170,1  0,052; 45  3,2
%%&
98520,1186
(  2)
45

Since F-value> Fcritic, we reject the null hypothesis and then we
conclude with a level of significance of 5% that there is a
statistically significant structural change in the model during the
hyperinflationary period

Nicaragua

Full regresión

Source |

SS

df

MS

Number of obs =

-------------+-----------------------------------------------------------

F(

1,

36

34) =

592.76

Model |

162370961

1

162370961

Prob > F

=

0.0000

Residual |

9313436.64
3436.64

34

273924.607

R squared
R-squared

=

0.9458

Adj R-squared
R
=

0.9442

Root MSE

523.38

-------------+----------------------------------------------------------Total |

171684398

35

4905268.51

=

----------------------------------------------------------------------------------------------------------------------------------------------------------prices |

Coef.

Std. Err.

t

P>|t|

[95% Conf. Interval]

-------------+------------------------------------------------------------------------------------------------------------------------------money |

.8866074

.036416

24.35

0.000

.8126011

.9606137

_cons |

125.0878

91.14757

1.37

0.179

-60.14633
60.14633

310.322

10000
5000
0
0

5000

10000

15000

money
Fitted values

.8

prices

Leverage
.4

.6

1988

.2

1990

1991

1989

0

1975
1978
1977
1980
1982
1992
2000
2006
2005
2008
1974
1981
1993
1999
1998
2004
2003
2002
2007
1976
1995
1985
1973
1979
1983
1996
1984
1997
2001
1994
1986
1987

0

.2
.4
Normalized residual squared

.6

Reggressing model with dummys for Hyperinflationary period (19881991)
To see whether there is a structural change in the model during the hyperinflationary times I will introduce a
Dummy in the model:
Dummy=1 if t=hyperinflationary times (Nicaragua case(1988-1991) t=16-19)
Dummy=0 if not
Model with dummy
Pricest=beta1+ beta2*moneyt+ beta3*dummyt+ beta4 dummy*money+ ut

If Dummy=1
Model: prices t=(beta1+beta3)+ (beta2+beta4)money t + u t
If dummy=0
Model: prices t= beta1 + beta2 money t + ut

Under H0: Beta3=beta4=0 (there is no structural change in the model)
By looking at the leverage graphic we can see the the influential observations are the ones for the years of
1988,1989,1990,1991 which are composed either by high leverage observations wither by outliers.

Stata codes
. gen obs=_n
. gen dummy=0
. replace dummy=1 if obs==16
(1 real change made)
. replace dummy=1 if obs==17
(1 real change made).
. replace dummy=1 if obs==18
(1 real change made)
. replace dummy=1 if obs==19
(1 real change made)

gen dmoney=money*dummy

. reg prices money dummy dmoney

Source |

SS

df

MS

Number of obs =

-------------+------------------------------

F(

3,

36

32) = 2429.82

Model |

170934013

3

56978004.5

Prob > F

=

0.0000

Residual |

750384.37

32

23449.5116

R-squared

=

0.9956

Adj R-squared =

0.9952

Root MSE

153.13

-------------+-----------------------------Total |

171684398

35

4905268.51

=

-----------------------------------------------------------------------------prices |

Coef.

Std. Err.

t

P>|t|

[95% Conf. Interval]

-------------+---------------------------------------------------------------money |

1.860181

.2740634

6.79

0.000

1.301932

2.41843

dummy |

2575.911

135.2056

19.05

0.000

2300.506

2851.316

dmoney |

-1.236711

.2746246

-4.50

0.000

-1.796103

-.6773195

_cons |

-29.30189

30.83229

-0.95

0.349

-92.10521

33.50144

By introducing the dummy variable we conclude that during hyperinflationary periods, a
unit change in annual % in money is reflected in a 0,6 percentual points change in inflation,
reflecting that there is some exogenous shock apart from changes in prices which are
causing this change in the value of inflation. When the dummy takes the value zero, this
relation is closer to one-to-one.
Notice R2 is almost 100% showing the introduction of the new variables increased the
explicative power of the model over inflation

Testing the structural change

The RSSE=9.313.436,64 and SSE=750.384,37
$%%&  %%&
9313436,64  750384,37
'
2 
  !"#   

182,58  0,052; 32  3,3
%%&
750384,37
(  2)
32

Since F-value>
value> Fcritic, we reject the null hypothesis and then we
conclude with a level of significance of 5% that there is a
statistically significant structural change in the model during the
hyperinflationary period

Israel

Model with all the 54 observations
Source |

SS

df

MS

-------------+-----------------------------------------------------------

Number of obs =
F(

1,

54

52) =

284.46

Model |

217697.428

1

217697.428

Prob > F

=

0.0000

Residual |

39795.8832

52

765.305445

R squared
R-squared

=

0.8454

-------------+-----------------------------Total |

257493.311

53

4858.36436

Adj R-squared =

0.8425

Root MSE

27.664

=

-----------------------------------------------------------------------------prices |

Coef.

Std. Err.

t

-------------+---------------------------------------------------------------money |
.8276106
.0490701
16.87
_cons |

-3.095239

4.353302

-0.71

P>|t|

[95% Conf. Interval]

0.000

.7291443

.926077

0.480

-11.83078

5.6403

0

100

200

300

400

------------------------------------------------------------------------------

0

100

200

300
money

prices

Fitted values

400

500

.8
.2

Leverage
.4

.6

1984

1983
1985

0

1980
1981
1982
2003
2004
2006
2005
2002
2008
1958
1964
2007
1957
1966
1965
1995
1963
1998
2009
1969
2001
2000
1973
1988
1996
1989
1997
1961
1970
1999
1968
1959
19861978
1991
1990
1972
1993
1977
1967
1960
1979
1976
1987
1974
1971
1975
1994
1962
1992
1956

0

.2

.4
Normalized residual squared

.6

.8

Reggressing model with dummys for Hyperinflationary period (19841985)
To sse whether there is a structural change in the model during the hyperinflationary times I will introduce a
Dummy in the model:
Dummy=1 if t=hyperinflationary times (Israel case(1984,1985 - t=29,30)
Dummy=0 if not
Model with dummy
Pricest=beta1+ beta2*moneyt+ beta3*dummyt+ beta4 dummy*money+ ut

If Dummy=1
Model: prices t=(beta1+beta3)+ (beta2+beta4)money t + u t
If dummy=0
Model: prices t= beta1 + beta2 money t + ut

Under H0: Beta3=beta4=0 (there is no structural change in the model)
By looking at the leverage graphic we can see the the influential observations are the ones for the years of
1984,1985 which are composed either by high leverage observations either by outliers.

Stata codes
. gen obs=_n
. gen dummy=0
. replace dummy=1 if obs==29
(1 real change made)
. replace dummy=1 if obs==30
(1 real change made).

gen dmoney=money*dummy

. reg prices money dummy dmoney

Source |

SS

df

MS

Number of obs =

-------------+------------------------------

F(

3,

54

50) =

453.11

Model |

248358.083

3

82786.0276

Prob > F

=

0.0000

Residual |

9135.22809

50

182.704562

R-squared

=

0.9645

Adj R-squared =

0.9624

Root MSE

13.517

-------------+-----------------------------Total |

257493.311

53

4858.36436

=

-----------------------------------------------------------------------------prices |

Coef.

Std. Err.

t

P>|t|

[95% Conf. Interval]

-------------+---------------------------------------------------------------money |

.813224

.0481041

16.91

0.000

.716604

.909844

dummy |

275.4169

21.39669

12.87

0.000

232.4404

318.3934

dmoney |

-.6105901

.0737808

-8.28

0.000

-.7587832

-.4623969

_cons |

-4.980728

2.462908

-2.02

0.049

-9.927624

-.0338329

------------------------------------------------------------------------------

By introducing the dummy variable we conclude that during hyperinflationary periods, a
unit change in annual % in money is reflected in a 0,2 percentual points change in inflation,
reflecting that there is some exogenous shock apart from changes in prices which are

causing this change in the value of inflation. When the dummy takes the value zero, this
relation is closer to one-to-one.
Notice R2 is almost 100% showing the introduction of the new variables increased the
explicative power of the model over inflation

Testing the structural change

The RSSE=39.795,8832 and SSE= 9135.22809
$%%&  %%&
39795,8832  9135,22809
'
2 
  !"#   

83,91  0,052; 50
%%&
9135,22809
(  2)
50 
3,18

Since F-value> Fcritic, we reject the null hypothesis and then we conclude with a level of
significance of 5% that there is a statistically significant structural change in the model
during the hyperinflationary period.

Pannel Analysis
In the last part of the problem set we want to see whether the four countries analysed
previously influence the overall relation between money and prices for the 18 countries.

To check this we will use a panel data which makes this analysis over countries and over
years.

For this purpose we need to construct a proper data with all the countries with the same
period where the variables were observed.
Then we will proceed to our econometric work:
We will estimate the following model:
Pricesit= beta1+ beta2*moneyit+ beya3*dummyit+ beta4dummoneyit+ uit
Where i represent the countries and t the time period
We construct our dummy by defining:
Dummyit=1 of country i was subject to hyperinflation
Dummyit=0 if country i was not subject to hyperinflation
Our null hypothesis will be that:
H0:beta3=beta4=0 (the hyperinflationary countries do not influence the relationship
between annual percentage change in money and prices over the 18 countries under
analysis)

Stata codes
Gen dummoney=money*dummy
xtreg prices money dummy dummoney, re i(code)

Random-effects GLS regression

Number of obs

=

486

Group variable (i): code

Number of groups

=

18

R-sq:

= 0.8836

Obs per group: min =

27

between = 0.9836

avg =

27.0

overall = 0.8928

max =

27

within

Random effects u_i ~ Gaussian

Wald chi2(3)

=

4016.05

corr(u_i, X)

Prob > chi2

=

0.0000

= 0 (assumed)

------------------------------------------------------------------------------

prices |

Coef.

Std. Err.

z

P>|z|

[95% Conf. Interval]

-------------+---------------------------------------------------------------money |

.7527448

.6407409

1.17

0.240

-.5030844

2.008574

dummy |

51.03512

32.60992

1.57

0.118

-12.87915

114.9494

dummoney |

.2863953

.6409639

0.45

0.655

-.9698708

1.542661

_cons |

-1.263624

17.59736

-0.07

0.943

-35.75381

33.22656

-------------+---------------------------------------------------------------sigma_u |

0

sigma_e |

278.86117

rho |

0

(fraction of variance due to u_i)

Since beta2+beta4= 1.03 we can conclude that there is almost a perfect one-to-one relation
between Money and prices within these 4 countries.
By doing the wald test we obtain a Wald-value=4016.05 for which prob(Wald-value>wald
critic)=0.0000 and hence we conclude that there is a statistically significant change in the
model including hyperinflationary countries or not.