SUKKUR IBA UNIVERSITY KANDHKOT CAMPUS

Analyzing Econometrics
Data by Using EViews
Interest rate effect on Investment

Submitted by: Zubair Ahmed Malik

Submitted to : Sir Khair Bux Mangiro
 ACKNOWLEDGEMENT

Thanks to Almighty Allah-The Creator, The Supreme, The True Judge, The Perfect
and Purest for all. Definitely, He is the Creator and Commandant, and gave us the
strength to accomplish our assigned management project.

History of all great work is to witness that no great work was ever done without the
support of your delegating hardworking team efforts.

I am submitting our generous gratitude to our instructor Sir Khair Bux Mangiro
lecturer at Sukkur IBA, University Kandhkot Campus, for his sincere and great
efforts to guide and make us able to complete this mega assignment report.

I would like to appreciate my teammates with my heartiest expressions for their

useful work, references and suggestions for this project. However, it would not have
been possible without the support of our teacher Sir Khair Bux Mangiro who guided
us about how to analyze and write the report analyzing the econometrics data by
using EViews.
Background/Introduction
As studies of economically data talks about the different test series and parameter to calculate
and evaluate the economics performance of any country with the help of using various numeric
variable. Likewise, inflation, unemployment, import, export, exchange rate etc. therefore
measuring the standards of economies and life style of the countries these variable can help us to
understand the countries economical dynamics in order to test the data. Moreover there are two
other variable which are directly or indirectly affecting the economics stats and also human life
while these are the interest and investment. Though the interest is the variable known as the
putting additional value on something we purchase or made in buying activity and investment is
where consumer and citizen are desired to invest in something it could short term asset and long
term bond while investment in big project exchange market or in marketable securities while
seeing the marginal propensity to consumer. With the investment country can accomplish the
raising in the GDP and better economic conditions such as investing in industries and real estate
market share and intangible assets so by this people can get the better life standard and success in
career and other factor. But there is factor of interest rate which can affect the investment due
government regulation and bureaucratic policy which impose in terms of tax effect and interest
rate. Therefore , in this report we will be sighted this relationship between interest rate and
investment and will analyze whether increase in interest rate cause a reduction in the investment
or it’s just a legend to show the commonalities impact on both variables. Moreover, we will be
implementing and discussing all those topics which are learnt in the class like; descriptive
statistics, correlation, regression with a single variable, multiple variable regressions, VAR
model (Vector Auto Regression) and so on. Laconically this report will help see the practicality
of the course studied and learn the practical implications. Moreover, we will indulge another
variable of foreign exchange in order to reduce omitted variable bias and make our study more
comprehensive as well as to cover most of the related variables that could lead to in-adequate
results and remedies. By including other variables we can make our study generalized and
reliable when considering the consequences to be summarized. So we will discuss the some
points below.

 Does Relationship between the interest rate and investment

 Does interest rate impact on investment

Research Methodology:
As I discussed previous the following research is calculated to see the impact of interest rate on
the investment. As an extension, an additional variable of foreign exchange rate is also used to
reduce the omitted variable bias and to check the multiple regression relationship among
variables. The panel data is used in this study that includes both, different intervals 1974 to 2000
as well as different variables (Interest, Fore Exchange Rates, and Interest) in Pakistani
background. Just the data used in this study is the secondary data that is resulting from a number
of sources like; SBP (State Bank of Pakistan), WB (World Bank), BS (Bureau of Statistics).
Subsequently, the data is evaluated in the EViews 12 where the data is processed under required
tests. Finally the results are interpreted.

Variables:
As mentioned earlier, in the
beginning I would be working on Interet
two important variables interest and
14
investment. Inflation is considered
12
as the independent explanatory
10
variable and imports are used as
8
dependent variable. Interest’s data is
6
derived from SBP (State Bank of
4
Pakistan’s) web which is
2
denominated in percentage and
0
similarly the investment data is 1970 1975 1980 1985 1990 1995 2000 2005
derived from WB’s (World Bank) portal which is denominated in the US billion dollars. Hence
to make the data into a single demonization the logarithm is taken first and then they are
interpreted. The data is time series data that starts from 1974and to 2020—having total 25 years
of data. Following is the data graphically that helps to understand and observe data more clearly.

Graphically representation:
Investment is time series data which starts from 1974 to 2000 (X-axis) and on Y-axis the
percentage of inflation is given. The graph is not trending neither have disruptions and thus from
the picturing we can say that may the data is stationary. In 1995the data has the highest peak that
shows the highest percent of inflation in the given history of Pakistan.

Imports data is given in US billion

dollars. On x-axis the years are
given and on y-axis imports billion Investment
USD are given. From the first sight 12
the data is seemingly trended as 10
from the inception is goes towards
8
an increase and follows the
increasing trend. But the 6
Component is stochastic and not 4
easy to be judged. Thus we can say
2
that the data might be is non-
stationary. 0
1970 1975 1980 1985 1990 1995 2000 2005
Data Analysis:
Exploratory data analysis is knows as broadest method to show the data into expressive way.
Where’s we usually get maximum insights from the data under study, check their structure,
visualize it, test it and make a comprehensive use of it. Following is the exploratory analysis of
data with laconic definitions:

Regression: descriptive way:

Regression is a statistical tool used for measuring the association, relationship, and suggests the
strength and dependency of the variables. Usually regression is used for two purposes. First and
most important, causal effects. When we are interested in determining the impact increase or
decreasing one variable into other variable. For example; in this study we are checking the
impact of increasing the inflation on imports. Second one is to predict the future values. For
example, what changes should I do in inflation rate to come up with a desired imports level? The
regression used here is for determining the impact of one variable on other variable.

Regression with One Variable

The following is the regression concluded by EViews 12 and the data is logarithmic data of both
Interest rate and Investment. Because Imports were in Billion USD and Inflation was in %.
Dependent Variable: INVESTMENT Investment = Constant + B1 (Inf)
Method: Least Squares
Date: 02/23/22 Time: 13:13
Sample (adjusted): 1975 2000
Included observations: 26 after
adjustments

Variable Coefficient Std. Error t Statistic Prob.

C 1.000075 0.142802 7.003231 0

INTEREST -0.063605 0.162843 -0.39059 0.6995

R-squared 0.006317 Mean dependent var 0.944724

Adjusted R-squared -0.035087 S.D. dependent var 0.088285
S.E. of regression 0.089821 Akaike info criterion -1.9082
Sum squared resid 0.193626 Schwarz criterion -1.81142
Log likelihood 26.80661 Hannan-Quinn criter. -1.88033
F-statistic 0.152563 Durbin-Watson stat 0.575617
Prob(F-statistic) 0.699544

Equation
Ln Imports = B0 + B1 (ln interest)
Where B0 is a constant of the equation and B1 is a coefficient of Interest.
Ln Imports = 1.000075- 0.063605 (ln Interest)

Interpretation
 B0: As mentioned B0 is nothing but an intercept. It has no meaning but just it shows the
value of independent variable when it touches Y-axis (X=0). The value of intercept is
1.000075 that shows investment would 1.000075 billion when there is no inflation.

12

10

8
 B1: B1 is a slope of the equation

inerest
6
and coefficient of the ln
Investment
inflation. That simply one 4 Linear (Investment)
percent increase in inflation
2
would cause 0.0635% increase
in the imports as it has a 0
positive slope. Is B1 significant? 5 6 7 8 9 10 11 12 13 14
Let’s check it. From checking investmen
B1‘s significance level we make
hypothesis. Null Hypothesis would be H 0 B1 = 0 and an alternative hypothesis would be,
H1 = B1 ≠ 0. This can be tested using t-statistics if the t-statistic is greater than 1.96 then
we will not reject our null hypotheses at 5% significance level otherwise reject. So our t-
statistics is 0.638935 which is lower than 1.96 (5% significance level). Hence we are not
rejecting our null hypothesis and can conclude that B1 is insignificant. That simply means
inflation cannot represent import in the given data set.
 R-Squared: R-squared is also called coefficient of determination. R-squared shows us
the percentage of the dependable variable explained by independent variable. At the same
time it also suggests how strong and reliable model is? It is also called the goodness of fit
indicator. In this case the R-squared is 0.06317 or simply 6.3 % of changes in imports are
caused by the inflation. This is too small number because the remaining 98% of the
imports are represented by other variables which are not incorporated in this model.
 SER (Standard Error of Regression): SER of regression shows the difference between
the actual points and the estimated points built be regression equation simply how wrong
your estimated model is from your actual model. SER is also a measure of goodness of
fit. In this model the standard error is 0.089821that shows 8.98% error and it’s a huge
difference that is an indicator that our regression model is not fit and need revisions.
 Akaike Information: Akaike Information is a statistics test that is tells the goodness of
fit of model like R2 does and among other similar tests Akaike Information is considered
as the most used and accurate. The near the Akaike Information to 0 the stronger the
model is. But Akaike Information in this model is -1.9082 which is bit far from 0. Simply
it gives us an indication that model we are using is not fir.
  Schwarz criterion: Schwarz criterion is similar to Akaike Information which is also a
fitness of good criteria. Similar to Akaike Information if the results are near 0 then model
said to be strong otherwise not. So our Schwarz criterion is -1.81142 which is relatively
far from 0 that also gives us an indication that our model is not fit.
 Hannan Quinin: Hannan Quinin is similar to the Schwarz criterion and Akaike
Information criterion. Simply it tells how fit the model is which you are using. If the
Hanin Quinin score are near to 0 that indicates that the model is fit otherwise not. Here in
this case the results are 1.88033which is relatively far from 0. Hence, we can conclude
that the model is not fit.
 Durbin Watson: Durbin Watson test a statistical test used to know the auto-correlation
in the data set. If the results of Durbin Watson test is 2 that means there is no auto-
correlation if it’s greater than two means there is negative auto-correlation. Similarly if
it’s less than means there is auto-correlation but that is positive. Here in this case the
Durbin Watson is 0.575617. That simply means there is a positive auto-correlation
between the Log of Imports and Log of inflation.

Difficult while using Regression with one Variable:

So we have seen that the slope of B1 is positive instead of being negative. That means increasing
the interest will highly impact on decrease in the investment. Similarly we will see increase the
interest will see a similar decrease in investment that simply means government should reduce
interest rate on investment will also be increased. But that is not the case. As mentioned earlier
that increase in interest will be reason a reduction in imports. The case is vice versa because of
omitted variable bias.