Assignment No: 02 Estimate VAR

(Vector Autoregressive test)

Student Name: Imran, Muhammad Student ID: 1120136004
Nankai University, China



Abstract:
Different numerical aggregates show different subsets of money based on their liquidity and
find per capita income. While this assignment reflects an overview of the M2 money supply
in contrast of population index from 1999 to 2013 (on monthly basis) in case of china to
assess the per capita income situation. From the observation of the results it reflects that
money supply has increased as well as population.

Introduction:
This assignment attempts evaluation of M2 money supply in china to analyse the impact of
money supply and population on the level of per capita. Further assess to which extent M2
and population effect the income distribution. This assignment will assess the per capita
income by drawing the ratio of M2 and population. Where M2 is the supply of money
includes everything in M1 and also savings and other time deposits. The amount of money
floating around the economy and available for spending is called money supply which in
supply market denoted by M, starting with M0 (the most liquid), which is just the dollar value
of physical cash and coin, and M1, which includes all of M0 as well as checking accounts,
travellers checks and demand deposits. The M2 aggregate includes the money value of all of
M1 in addition to savings accounts, time deposits (such as certificates of deposit), and money
market funds held by investors.
The Federal Reserve has control over the money supply aggregates. Through open market
operation such as buying and selling bonds, treasury bills and setting the reserve
requirements, the Federal reserve alter the money supply through its daily course of business.
Setting short-term and long-term interest rates to guide the economy, has further impact on
the behaviour to invest (not to invest) from the indigenous and other investors from outside.


Econometric Calculation:
To do this assignment I used EVIEWS 7.2 and Microsoft office 2013. First I calculated the
VAR for the actual data (the results are given below in table 1) and checked whether there is
Unit Root (Table 2), and I found that data the actual data shows a Unit Root problem which
pointing the fact we need to tackle the problem by some alternate way, meanwhile I took the
help of Residuals to omit the Unit root (Table 4) and again draw the VAR (Table 3), by doing
so I found it was successful and we get rid of the Unit Root. Where Residual01 is for M2 and
Residual02 for Population throughout the assignment.



Null Hypothesis: D(M2,2) has a unit root
Exogenous: Constant
Lag Length: 10 (Automatic - based on SIC, maxlag=13)


t-Statistic Prob.*


Augmented Dickey-Fuller test statistic -9.921620 0.0000
Test critical values: 1% level -3.472534
5% level -2.879966
10% level -2.576674


*MacKinnon (1996) one-sided p-values.



Null Hypothesis: D(POPULATION,2) has a unit root
Exogenous: Constant
Lag Length: 10 (Automatic - based on SIC, maxlag=13)


t-Statistic Prob.*


Augmented Dickey-Fuller test statistic -46.37046 0.0001
Test critical values: 1% level -3.472534
5% level -2.879966
10% level -2.576674


*MacKinnon (1996) one-sided p-values.



Table 1: Actual VAR

Vector Autoregression Estimates
Date: 05/15/14 Time: 22:05
Sample (adjusted): 2000M02 2013M12
Included observations: 167 after adjustments
Standard errors in ( ) & t-statistics in [ ]


M2 POPULATION


M2(-1) 0.785681 0.005454
(0.07867) (0.00230)
[ 9.98732] [ 2.37366]

M2(-2) 0.219644 -0.005462
(0.07895) (0.00231)
[ 2.78203] [-2.36844]

POPULATION(-1) -0.655791 0.891051
(2.51184) (0.07337)
[-0.26108] [ 12.1449]

POPULATION(-2) 1.601074 0.097046
(2.49128) (0.07277)
[ 0.64267] [ 1.33364]

C -119463.8 1595.461
(63158.0) (1844.78)
[-1.89151] [ 0.86485]


R-squared 0.999538 0.995621
Adj. R-squared 0.999527 0.995513
Sum sq. resids 6.55E+09 5591253.
S.E. equation 6360.345 185.7792
F-statistic 87619.68 9207.458
Log likelihood -1696.983 -1106.926
Akaike AIC 20.38304 13.31648
Schwarz SC 20.47639 13.40983
Mean dependent 450367.4 131618.8
S.D. dependent 292319.5 2773.294


Determinant resid covariance (dof adj.) 1.36E+12
Determinant resid covariance 1.28E+12
Log likelihood -2801.561
Akaike information criterion 33.67139
Schwarz criterion 33.85810




















Table 2: Stability condition

Roots of Characteristic Polynomial
Endogenous variables: M2 POPULATION
Exogenous variables: C
Lag specification: 1 2
Date: 05/15/14 Time: 22:06


Root Modulus


1.005288 1.005288
0.992132 0.992132
-0.160344 - 0.066551i 0.173607
-0.160344 + 0.066551i 0.173607


Warning: At least one root outside the unit circle.
VAR does not satisfy the stability condition.


Table 3: Residuals VAR

Vector Autoregression Estimates
Date: 05/15/14 Time: 22:09
Sample (adjusted): 2000M04 2013M12
Included observations: 165 after adjustments
Standard errors in ( ) & t-statistics in [ ]


RESID01 RESID02


RESID01(-1) -0.031291 0.000674
(0.08126) (0.00237)
[-0.38506] [ 0.28404]

RESID01(-2) -0.058801 0.002011
(0.08155) (0.00238)
[-0.72104] [ 0.84429]

RESID02(-1) 1.422190 -0.030819
(2.73357) (0.07982)
[ 0.52027] [-0.38609]

RESID02(-2) 2.998437 -0.083288
(2.73696) (0.07992)
[ 1.09554] [-1.04212]

C -14.25145 0.686034
(495.497) (14.4690)
[-0.02876] [ 0.04741]


R-squared 0.011046 0.010453
Adj. R-squared -0.013678 -0.014285
Sum sq. resids 6.48E+09 5525038.
S.E. equation 6363.713 185.8265
F-statistic 0.446787 0.422557
Log likelihood -1676.717 -1093.680
Akaike AIC 20.38445 13.31734
Schwarz SC 20.47857 13.41146
Mean dependent -8.750557 0.535054
S.D. dependent 6320.634 184.5133


Determinant resid covariance (dof adj.) 1.35E+12
Determinant resid covariance 1.27E+12
Log likelihood -2767.702
Akaike information criterion 33.66911
Schwarz criterion 33.85735



Table 4: VAR stability condition

Roots of Characteristic Polynomial
Endogenous variables: RESID01 RESID02
Exogenous variables: C
Lag specification: 1 2
Date: 05/15/14 Time: 22:10


Root Modulus


-0.031031 - 0.385599i 0.386846
-0.031031 + 0.385599i 0.386846
-0.086962 0.086962
0.086915 0.086915


No root lies outside the unit circle.
VAR satisfies the stability condition.

After completing the computation of VAR we now turn to check the impulse response and Variance
Decomposition process of the lags and variables under consideration. These two can be observed in
the following two group of figures.
Impulse Response:





-2,000
0
2,000
4,000
6,000
8,000
1 2 3 4 5 6 7 8 9 10
Response of RESID01 to RESID01
-2,000
0
2,000
4,000
6,000
8,000
1 2 3 4 5 6 7 8 9 10
Response of RESID01 to RESID02
-50
0
50
100
150
200
250
1 2 3 4 5 6 7 8 9 10
Response of RESID02 to RESID01
-50
0
50
100
150
200
250
1 2 3 4 5 6 7 8 9 10
Response of RESID02 to RESID02
Response to Cholesky One S.D. Innovations 2 S.E.
Variance Decomposition:





Table 5: Co-integration Check

Date: 05/15/14 Time: 22:14
Sample (adjusted): 2000M05 2013M12
Included observations: 164 after adjustments
Trend assumption: Linear deterministic trend
Series: RESID01 RESID02
Lags interval (in first differences): 1 to 2

Unrestricted Cointegration Rank Test (Trace)


Hypothesized Trace 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**


None * 0.328408 88.45313 15.49471 0.0000
At most 1 * 0.131723 23.16408 3.841466 0.0000


Trace test indicates 2 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)


Hypothesized Max-Eigen 0.05
0
20
40
60
80
100
1 2 3 4 5 6 7 8 9 10
Percent RESID01 variance due to RESID01
0
20
40
60
80
100
1 2 3 4 5 6 7 8 9 10
Percent RESID01 variance due to RESID02
0
20
40
60
80
100
1 2 3 4 5 6 7 8 9 10
Percent RESID02 variance due to RESID01
0
20
40
60
80
100
1 2 3 4 5 6 7 8 9 10
Percent RESID02 variance due to RESID02
Variance Decomposition
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**


None * 0.328408 65.28905 14.26460 0.0000
At most 1 * 0.131723 23.16408 3.841466 0.0000


Max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):


RESID01 RESID02
-5.44E-06 0.009832
0.000295 -0.002459



Unrestricted Adjustment Coefficients (alpha):


D(RESID01) -773.6482 -2213.385
D(RESID02) -126.3140 -2.879105



1 Cointegrating Equation(s): Log likelihood -2745.713


Normalized cointegrating coefficients (standard error in parentheses)
RESID01 RESID02
1.000000 -1807.760
(204.682)

Adjustment coefficients (standard error in parentheses)
D(RESID01) 0.004208
(0.00268)
D(RESID02) 0.000687
(7.8E-05)


From Table 5 we observed that there is no co-integration in both the variable at 5% level.

VAR Model of Residuals 01(M2) and 02(Population):
===============================
M2= C(1,1)*M2(-1) + C(1,2)*M2(-2) + C(1,3)*Population(-1) + C(1,4)*Population(-2) + C(1,5)

Population = C(2,1)*M2(-1) + C(2,2)*M2(-2) + C(2,3)*Population(-1) + C(2,4)*Population(-2) +
C(2,5)

VAR Model - Substituted Coefficients:
===============================
M2= - 0.0312909114597*M2 (-1) - 0.058800627366*M2 (-2) + 1.42219001898*Population (-1) +
2.99843726648*Population (-2) - 14.2514549505

Population = 0.000674010355689*M2 (-1) + 0.00201053807769*M2 (-2) -
0.0308188462998*Population (-1) - 0.0832878160256*Population (-2) + 0.68603367561