this study, the Augmented Dickey-Fuller (ADF) and Phillip-Perron test (PP) are used for unit root test to check the stationarity of the variables. Both tests test the null hypothesis of a unit root and the null hypothesis of a unit root is rejected in favour of the stationary alternative in each case if the test statistic is more negative than the critical value. A rejection of the null hypothesis means that the series do not have a unit root. Table 1 presents results of the unit root tests. Results of unit root tests reported in Table 1 below show that when considering the ADF test, the variables GDP and MS are stationary at level series whilst the variables EXC, CPI and REPO are not stationary at level series but however become stationary after first difference. When using the PP test, all variables are stationary after first differencing except for the variable CPI which is stationary at level series. Considering results of the much stricter PP test, variables are thus integrated of order 0 and 1. Table 1: Unit root tests 2000Q1- 20010Q4 at levels and first differences (ǻ) GDPMSEXCCPIREPO ADFLevel -3.228029*-4.178733**-2.260465-2.403507-2182617 First Difference-3.174193**-5.548346***-3.369273** PPLevel -2.090200-1.574085-1.576060-2.606956*-1.393391 First Difference-3.197683**-5.816582***-3.284369**-3.107152** ***, ** and * represents stationary at 1%, 5% and 10% level of significance respectively Co integration Analysis Result and Interpretation 5.2After establishing stationarity, the next step is to test for cointegration. Cointegration exists if two variables have a long-term, or equilibrium, relationship between them. This study employs the Johansen maximum likelihood approach to test for co-integration as it more desirable to the other methods due to its properties (Wassell and Saunders, 2000). As a requirement of the Johansen co-integration technique, the optimums lag length, the appropriate model regarding the deterministic components in the multivariate system and the numbers of cointegrating vectors were all determined before establishing the long and short run coefficients. Table 2 below presents results an optimal lag length. As indicated in Table 2, all methods except the SC chose 6 lags, whilst 2 lags were chosen by the SC method. Brooks (2008) explains that when choosing the optimum number of lags using the information criteria, the chosen number of lags is that number minimising the value of the given information criterion. To add on, various literature for example Wahid (2008), Asghar
ISSN 2039-2117 (online) ISSN 2039-9340 (print) Mediterranean Journal of Social Sciences MCSER Publishing, Rome-Italy Vol 5 No 15 July 2014 81and Abid (2007) as well as Mahlo (2011) support the selection of the optimum number of lags chosen by the SC. Accordingly the Johansen cointegration test is employed using 1 lag for the VAR in this study. Table 2: VAR lag order selection criteria Lag LogL LRFPEAICSCHQ 0 -533.4579NA175764.526.2662426.4752126.34233 1 -376.7503267.5495287.918219.8414821.09531*20.29806* 2 -348.265141.68562*257.080619.6714721.9701620.50853 3 -317.590537.40805226.7194*19.39466*22.7382220.61220 * indicates lag order selected by the criterion, FPE: Final prediction error, AIC: Akaike information criterion, SC: Schwarz information criterion, HQ:Hannan-Quinn information criterion
As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.
KiranTemple University Fox School of Business ‘17, Course Hero Intern
I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.
DanaUniversity of Pennsylvania ‘17, Course Hero Intern
The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.
JillTulane University ‘16, Course Hero Intern
Stuck? We have tutors online 24/7 who can help you get unstuck.
Ask Expert Tutors
You can ask
You can ask
You can ask
(will expire )