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- Monetary Policy[1] Morten Inezfix[1]
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You are on page 1of 21

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.

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