ECOM023 Econometrics

Exercise Sheet 9: Solutions

R.G. Pierse

Q1.(a)

Null Hypothesis: D(CEXP) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 1 (Automatic based on SIC, MAXLAG=13)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -6.911530 0.0000
Test critical values: 1% level -4.014635
5% level -3.437289
10% level -3.142837
=============================================================
*MacKinnon (1996) one-sided p-values.

Null Hypothesis: D(CEXP) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 4 (Fixed)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -5.469021 0.0000
Test critical values: 1% level -4.015700
5% level -3.437801
10% level -3.143138
=============================================================
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: CEXP has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 2 (Automatic based on SIC, MAXLAG=13)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -2.055749 0.5661
Test critical values: 1% level -4.014635
5% level -3.437289
10% level -3.142837
=============================================================
*MacKinnon (1996) one-sided p-values.

Null Hypothesis: CEXP has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 4 (Fixed)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -2.159342 0.5086
Test critical values: 1% level -4.015341
5% level -3.437629
10% level -3.143037
=============================================================
*MacKinnon (1996) one-sided p-values.

ADF tests on the …rst di¤erence of CEXP clearly reject a unit root whereas
ADF tests on CEXP fail to reject a unit root. Thus the conclusion is that CEXP
is I(1).

2
Null Hypothesis: D(I) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=13)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -7.647603 0.0000
Test critical values: 1% level -4.014288
5% level -3.437122
10% level -3.142739
=============================================================
*MacKinnon (1996) one-sided p-values.
=============================================================

Null Hypothesis: D(I) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 4 (Fixed)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -6.491239 0.0000
Test critical values: 1% level -4.015700
5% level -3.437801
10% level -3.143138
=============================================================
*MacKinnon (1996) one-sided p-values.

3
Null Hypothesis: I has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 1 (Automatic based on SIC, MAXLAG=13)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -4.685160 0.0011
Test critical values: 1% level -4.014288
5% level -3.437122
10% level -3.142739
=============================================================
*MacKinnon (1996) one-sided p-values.

Null Hypothesis: I has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 4 (Fixed)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -3.577993 0.0348
Test critical values: 1% level -4.015341
5% level -3.437629
10% level -3.143037
=============================================================
*MacKinnon (1996) one-sided p-values.

ADF tests on the …rst di¤erence of I clearly reject a unit root. ADF tests
on I, allowing for a trend, reject a unit root when one lag is included but fail to
reject when four lags are included. The conclusion is that I is I(1) but we may
allow the possibility of I(0).

4
Null Hypothesis: D(Y) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=13)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -8.873889 0.0000
Test critical values: 1% level -4.014288
5% level -3.437122
10% level -3.142739
=============================================================
*MacKinnon (1996) one-sided p-values.

Null Hypothesis: D(Y) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 4 (Fixed)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -6.715538 0.0000
Test critical values: 1% level -4.015700
5% level -3.437801
10% level -3.143138
=============================================================
*MacKinnon (1996) one-sided p-values.

5
 Null Hypothesis: Y has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 1 (Automatic based on SIC, MAXLAG=13)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -3.107207 0.1081
Test critical values: 1% level -4.014288
5% level -3.437122
10% level -3.142739
=============================================================
*MacKinnon (1996) one-sided p-values.

Null Hypothesis: Y has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 4 (Fixed)
=============================================================
t-Statistic Prob.*
=============================================================
Augmented Dickey-Fuller test statistic -2.604727 0.2789
Test critical values: 1% level -4.015341
5% level -3.437629
10% level -3.143037
=============================================================
*MacKinnon (1996) one-sided p-values.

ADF tests on the …rst di¤erence of Y clearly reject a unit root whereas ADF
tests on Y fail to reject a unit root. Thus the conclusion is that Y is I(1).

6
 Q1 (b)
Date: 02/26/03 Time: 18:51
Sample(adjusted): 1948:4 1988:4
Included observations: 161 after adjusting endpoints
Trend assumption: Linear deterministic trend
Series: CEXP I Y
Lags interval (in first differences): 1 to 6
=============================================================
Unrestricted Cointegration Rank Test
=============================================================
Hypothesized Trace 5 Percent 1 Percent
No. of CE(s) Eigenvalue Statistic Critical Value Critical Value
=============================================================
None ** 0.141257 40.44061 29.68 35.65
At most 1 * 0.074439 15.92255 15.41 20.04
At most 2 0.021312 3.468365 3.76 6.65
=============================================================
*(**) denotes rejection of the hypothesis at the 5%(1%) level
Trace test indicates 2 cointegrating equation(s) at the 5% level
Trace test indicates 1 cointegrating equation(s) at the 1% level

=============================================================
Hypothesized Max-Eigen 5 Percent 1 Percent
No. of CE(s) Eigenvalue Statistic Critical Value Critical Value
=============================================================
None * 0.141257 24.51806 20.97 25.52
At most 1 0.074439 12.45419 14.07 18.63
At most 2 0.021312 3.468365 3.76 6.65
=============================================================
*(**) denotes rejection of the hypothesis at the 5%(1%) level
Max-eigenvalue test indicates 1 cointegrating equation(s) at the 5% level
Max-eigenvalue test indicates no cointegration at the 1% level
Both the maximal eigenvalue test suggests one cointegrating vector but the
trace test suggests that there are two cointegrating vectors. However, the results
are not robust to changing the sample size or the order of the VAR process. Thus
there is doubt as to whether there is one or two cointegrating vectors here. King et
al. (using di¤erent techniques) decided that there were two cointegrating vectors.

7
 Unrestricted Cointegrating Coefficients (normalized by b’*S11*b=I):
=============================================================
CEXP I Y
18.92295 -29.73313 9.982489
64.24768 18.87251 -86.96411
-1.953181 2.645521 4.617982
=============================================================

Unrestricted Adjustment Coefficients (alpha):

=============================================================
D(CEXP) 0.001152 0.000146 -0.000929
D(I) 0.007889 0.002211 -0.000227
D(Y) 0.001467 0.002780 -0.000554
=============================================================

2 Cointegrating Equation(s): Log likelihood 1532.735

=============================================================
Normalized cointegrating coefficients (std.err. in parentheses)
CEXP I Y
1.000000 0.000000 -1.057296
(0.02215)
0.000000 1.000000 -1.008627
(0.03320)

Adjustment coefficients (std.err. in parentheses)

D(CEXP) 0.031172 -0.031502
(0.03941) (0.02072)
D(I) 0.291347 -0.192817
(0.11852) (0.06232)
D(Y) 0.206388 0.008844
(0.06270) (0.03297)
=============================================================

8
 Q1 (c)
Restrictions:
=============================================================
B(1,3)=-1, B(1,2)=0, B(1,1)=1,B(2,1)=0,B(2,2)=1,B(2,3)=-1
=============================================================
Tests of cointegration restrictions:
=============================================================
Hypothesized Restricted LR Degrees of
No. of CE(s) Log-likehood Statistic Freedom Probability
=============================================================
2 1531.013 3.443259 2 0.178775
=============================================================

2 Cointegrating Equation(s): Convergence achieved after 1 iterations.

=============================================================
Restricted cointegrating coefficients (std.err. in parentheses)
CEXP I Y
1.000000 0.000000 -1.000000
(0.00000) (0.00000) (0.00000)
0.000000 1.000000 -1.000000
(0.00000) (0.00000) (0.00000)

Adjustment coefficients (std.err. in parentheses)

D(CEXP) -0.007325 -0.038963

(0.03107) (0.02058)
D(I) 0.190264 -0.206020
(0.09398) (0.06225)
D(Y) 0.114671 -0.004139
(0.05032) (0.03333)
The restrictions that the two cointegrating vectors can be written as:

CEXP = Y + u1 and I = Y + u2

cannot be rejected even at the 15% level. This is consistent with a long run
equilibrium unit elasticity of unity with respect to income for both consumption
and investment.