APPLIED ECONOMETRICS
FINAL PROJECT
PINAR KELBA
13110000350
ZMR 2016
Abstract
In this paper; I examine the relationship between Money Demand, Interest Rate and Income. So
in this context; for the period between 1985 and 2014 in Norway, the interest rate, and the income
and their impact on the money demand has been discussed. Finding money demand in an
economy is not possible so basic economics equation says that, money demand equals money
supply, money supply used as money demand.
The Model;
https://data.oecd.org/interest/long-term-interest-rates-forecast.htm#indicator-chart!
http://data.worldbank.org/indicator/NY.GDP.PCAP.CD!
Properties of Data
67.500
45.000
22.500
0
0,00 1,00 2,00 3,00 4,00
Ordinary Least Squares
F- Test
H0: Parameters in the model are insignificant.
H1 Parameters in the model are significant.
T- Test
H0: 0=0; 1=0; 2=0
H1: 0 0; 10; 20
P-value for 0 is 0.0387 < 0.05
1 is 8.86e-15 < 0.01
2 is 0.0222 < 0.05 Reject the null hypothesis.
The R2 is also quite high (0.97) signifying a strong relationship between the income and interest
rate, and the money supply.
In an economy, 1 unit of increase in income, money supply also increase 0.00100814 unit.
When income and interest rate is equal to zero, money supply is 15.1536.
Standard error for 0 is 6.97317, for 1 is 6.61821e-05 and for 2 is 0.562768.
Jarque Bera Normality Test
Frequency distribution for uhat3, obs 1-30
Number of bins =7, mean =3.31587e-15, sd=5.84507
lambda
=eigenvalues of
X'X, largest to
smallest
cond = condition
index
note: variance proportions columns sum to 1.0
dL = 1.2837
dU = 1.5666
Breusch-Godfrey Test
H0: =0 (No autocorrelation)
H1:0 (Autocorrelation)
Breusch-Godfrey test for first-order autocorrelation
OLS, using observations 1985-2014 (T = 30)!
Dependent variable: uhat
BroadMS_M4 1.0000
(0.0000)
Income -6.4973e+11
(8.3294e+12)
InterestRate 2.2178e+16
(6.3126e+16)
BroadMS_M4 8.2982e-19
Income 4.5242e-15
InterestRate -2.8855e-18
Log-likelihood = nan
Determinant of covariance matrix = 44461441
AIC = nan
BIC = nan
HQC = nan
Equation 1: d_BroadMS_M4
Equation 2: d_Income
determinant = 4.44614e+07
Fcalc < Fcrit Could not reject H0 . Money supply does not cause interest rate.
Conclusion
In this project, I examined the relationship between money supply, interest rate and income. Money
supply is a dependent variable, interest rate and income are independent variable. As I explained
before, there is a negative relationship between money supply and interest rate.
F- tests and T- Tests conclusions, parameters in the model, estimator and coefficient are
significant. So this model is statistically meaningful and there is a relationship between these. In
Jarque- Beras result; residuals are normally distributed. It means that assumption is valid and
model inference (confidence intervals, model predictions) also be valid.
And in multicollinearity test, the result is there is no multicollinearity. So meaning that one can be
linearly predicted from the others with a substantial degree of accuracy.
In Whites Test calculation there is heteroscedasticity obtained. When the standard deviations of
this variable, monitored over a specific amount of time, are non-constant. Variance of money
supply model, is not constant. When we apply Durbin Watson test in this model; we obtained there
exist positive autocorrelation. A positive correlation exists when as one variable decreases, the
other variable also decreases and vice versa. So there is an increase in income, interest rate will
also increase as a same amount. Breusch- Godfrey test says that; there is autocorrelation. This
means, there is a correlation between error terms in this models variables. There is a change in
incomes error term, interest rates error term will also change. In the other hand when we analyze
Ramseys RESET test; model is correctly specified. If the regression equation contains all of the
relevant predictors, including any necessary transformations and interaction terms. That is, there
are no missing, redundant or extraneous predictors in the model. And we examine causality,
Granger Causality test says; money supply does not cause interest rate. This means there is a
change in money supply, interest rate will not effect.