Using Eviews to construct an ARDL Bound Test

1.

These criteria are suggested for author to select the optimum lag in the ARDL
modeling, namely
1. Akaike Information Criterion
2. Schwarz Bayesian Criterion
3. General to specific model
For Example: Our regression model RPCC = f(RGDPC, UN, WAGE, TAX, LL)
(See the file poverty and fd) and the selected optimum lag length is (1, 1, 0, 0, 0, 0)
ARDL Model Equation (1):
p

i 1

i 0

i 0

RPCC const 1,t RPCCt i 2,t RGDPCt i 3,tUN t i

s

i 0

i 0

i 0

4,tWAGEt i 5,tTAX t i 6,t LLt i 7,t DUM t

where
RPCC = real Consumption Per capita
Const = constant
RGDPC = real GDP Per capita
UN = unemployment
WAGE = Wages
TAX = Individual Tax
LL = Liquid Liability
DUM = 1 for crisis and 0 for otherwise; the crisis is refer to the Malaysian
oil crisis at 1973, 1974, 1980 and 1981; commodities crisis at 1985 to 1986;
and 1997/98 for Asian financial Crisis.
p, q, r, s, u, v = optimum lag length uses in model

t = residual
Such based on the AIC or SBC criteria, the selected lag length for this model (p, q,
r, s, u, v) is (1, 1, 0, 0, 0, 0). This can use Microfit or Rats programming code to
obtain the optimum lag base on such listed criteria.

2.

After selected lag length, using Eviews to estimate the Long-run OLS. The Eviews
output is showed as following:
Dependent Variable: RPCC
Method: Least Squares
Date: 06/28/09 Time: 21:23
Sample (adjusted): 1971 2004
Included observations: 34 after adjustments

The coefficient for the

variables in the Eviews
output is shows as:
c(1)

Variable

Coefficient

Std. Error

t-Statistic

Prob.
c(2)

C
RPCC(-1)
RGDPC
RGDPC(-1)
UN
WAGE
TAX
LL
DUM

1.380580
0.688508
0.981537
-0.866497
0.010227
-0.019567
0.071253
-0.095664
0.015761

1.142938
0.175616
0.179936
0.237380
0.036818
0.047700
0.047672
0.036619
0.016593

1.207922
3.920539
5.454926
-3.650252
0.277762
-0.410202
1.494647
-2.612439
0.949891

0.2384
c(4)
0.0006
c(5)
0.0000
0.0012
c(6)
0.7835
c(7)
0.6852
c(8)
0.1475
c(9)
0.0150
0.3513

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

3.

0.992724
0.990396
0.030182
0.022774
76.00083
426.3952
0.000000

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

c(3)

7.949910
0.307982
-3.941225
-3.537189
-3.803437
1.789455

After the estimate ARDL model, we have using the Wald Test to compute the
long run elasticities and it standard error.
According to Pesaran et al. (2001) the Long run elasticities should compute as
follow:
q

Elasticities _ for _ RGDPC

2 ,t

i
p

1 1,t
i

= Sum of the independent coefficients (RGDPC)

1 Sum of the dependent coefficients

4.

Go to View Coefficient Test Wald Test

Type in the code:
(c(3)+c(4))/(1-c(2))=0
In the Wald Test
windows

Eviews Output:
Wald Test:
Equation: Untitled
Test Statistic
F-statistic
Chi-square

Value
0.507750
0.507750

df

Probability

(1, 25)
1

0.4827
0.4761

Value

Std. Err.

0.369318

0.518293

The value of elasticities

is shows as 0.369318.
The standard error is
0.518293. However, the
t-statistic need compute
by the user, where t-stat
= coefficient / std. Err.

Null Hypothesis Summary:

Normalized Restriction (= 0)
(C(3) + C(4)) / (1 - C(2))

Delta method computed using analytic derivatives.

The probability 0.4827

also represent as pvalue for the computed
elasticities.

For others variables elasticities are showed as: constant (4.4322), RGDPC (0.36932), UN
(0.032831), WAGE (-0.062815), TAX (0.22875), LL (-0.30712), DUM (0.050599).

5.

After computed the all long-run elasticities, we need proceed into short-run Error
correction Model.
a.
Firstly, compute the values of Error Correction Term (ECT). Based on the
knowledge the ECT is represent as a long-run steady point for the model or
more statistically the ECT is a residual from long-run cointegration model.
Long-run Cointegration Model (Equation 2):
q

RPCCt

const

1 1,t

1 1,t
i 1

i 0

1 1,t

RGDPCt

i 0

5 ,t

2 ,t

3, t
i 0

1 1,t

UN t

i 1

i 0

4 ,t

1 1,t

WAGE t

i 1

TAX t

i 1

i 0

6 ,t

1 1,t

LLt

i 1

7
p

1 1,t

DUM ECTt

(2)

i 1

After some mathematical adjustment, the Error correction term equation is shows
as:
q

ECTt RPCC

2 ,t
i 0

1 1,t

RGDPCt

i 1

5 ,t
i 0

1 1,t
i 1

3, t
i 0

1 1,t

UN t

i 1

i 0

4 ,t

1 1,t

WAGE t

i 1

TAX t

i 0

6 ,t

1 1,t

LLt

(3)

i 1

Therefore, based on the previous example model and using the calculated
elasticities, the Long-run Cointegrated Model is shows as following:
RPCC = 4.4322 + 0.36932 RGDPC + 0.032831 UN 0.062815 WAGE +
0.22875 TAX 0.30712 LL + 0.050599 DUM
Hence, the ECT equation shows as:
ECT = RPCC 0.36932*RGDPC 0.032831*UN + 0.062815*WAGE
0.22875*TAX + 0.30712*LL
So, generate this ECT equation in the Eviews before the Short-run dynamic model.

b.

Type in the ECT equation on the upper blank box of Eviews and then Enter.

Type in this equation on the top

blank box:
ECT = RPCC 0.36932*RGDPC
0.032831*UN + 0.062815*WAGE
0.22875*TAX + 0.30712*LL

Furthermore, press the Enter and

the ECT will shows in the workfile
windows.

6.

After generated the ECT series, now we have go to Quick Estimate Equation
choose the method TSLS.

7.

Now the Eviews shows you two boxes, one is for Equation specification and other
one is for instrument list.
a. The Equation Specification is refer to the Short-run dynamic model, which is:

p 1

q 1

RPCC const t ECTt 1 1,t RPCCt i 2,t RGDPCt i

i 1

r 1

i 0

3,t

i 0

u 1

i 0

i 0

UN t i 4,t WAGEt i 5,t TAX t i

v 1

i 0

s 1

6 ,t

LLt i 7 ,t DUM t

For our Example:

The Equation Specification code is follows:
D(RPCC)
D(TAX)

C
ECT(-1)
D(RGDPC)
D(LL)
DUM

D(UN)

D(WAGE)

b. The instrument list refers to the endogenous for ECT models. For our Example,
the Eviews code to represent the exogenous variables for our ECT model is:
C
RPCC(-1)
RGDPC
RGDPC(-1) UN
WAGE
TAX
LL

Type in this equation on the

Equation Specification box:
D(RPCC)
C
ECT(-1)
D(RGDPC) D(UN) D(WAGE)
D(TAX) D(LL) DUM
Furthermore, type
instrument list:

in

the

C
RPCC(-1)
RGDPC
RGDPC(-1) UN WAGE TAX
LL

After that click Options and tick that Heteroskedasticity consistent coefficient
covariance and Newey-West and then click ok.
Click on Options and
tick
the
box
of
Heteroskedasticity
consistent
coefficient
covariance and NeweyWest.
And then click ok.

8. After that you should get the Short-run dynamic results as follows:
Dependent Variable: D(RPCC)
Method: Two-Stage Least Squares
Date: 06/29/09 Time: 10:19
Sample (adjusted): 1971 2004
Included observations: 34 after adjustments
Newey-West HAC Standard Errors & Covariance (lag truncation=3)
Instrument list: C RPCC(-1) RGDPC RGDPC(-1) UN WAGE TAX LL
Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
ECT(-1)
D(RGDPC)
D(UN)
D(WAGE)
D(TAX)
D(LL)
DUM

1.380587
-0.311494
0.981566
0.010237
-0.019561
0.071255
-0.095667
0.015762

1.160771
0.259603
0.410089
0.146174
0.058823
0.046388
0.049627
0.018952

1.189371
-1.199883
2.393546
0.070031
-0.332532
1.536072
-1.927704
0.831679

0.2450
0.2410
0.0242
0.9447
0.7422
0.1366
0.0649
0.4132

R-squared
Adjusted R-squared
S.E. of regression
F-statistic
Prob(F-statistic)

0.768700
0.706427
0.029595
12.34394
0.000001

Mean dependent var

S.D. dependent var
Sum squared resid
Durbin-Watson stat
Second-Stage SSR

0.031574
0.054622
0.022773
1.789467
0.022774

As compared to the Microfit Output:

Error Correction Representation for the Selected ARDL Model
ARDL(1,1,0,0,0,0) selected based on Schwarz Bayesian Criterion
*******************************************************************************
Dependent variable is dRPCC
34 observations used for estimation from 1971 to 2004
*******************************************************************************
Regressor
Coefficient
Standard Error
T-Ratio[Prob]
dRGDPC
.98154
.17994
5.4549[.000]
dUN
.010227
.036818
.27776[.783]
dWAGE
-.019567
.047700
-.41020[.685]
dTAX
.071253
.047672
1.4946[.147]
dLL
-.095664
.036619
-2.6124[.015]
dINPT
1.3806
1.1429
1.2079[.238]
dDUM
.015761
.016593
.94989[.351]
ecm(-1)
-.31149
.17562
-1.7737[.088]
*******************************************************************************
List of additional temporary variables created:
dRPCC = RPCC-RPCC(-1)
dRGDPC = RGDPC-RGDPC(-1)
dUN = UN-UN(-1)
dWAGE = WAGE-WAGE(-1)
dTAX = TAX-TAX(-1)
dLL = LL-LL(-1)
dINPT = INPT-INPT(-1)
dDUM = DUM-DUM(-1)
ecm = RPCC
-.36932*RGDPC -.032831*UN + .062815*WAGE
-.22875*TAX +
.30
712*LL
-4.4322*INPT -.050599*DUM
*******************************************************************************
R-Squared
.76870
R-Bar-Squared
.69468
S.E. of Regression
.030182
F-stat.
F( 7, 26)
11.8689[.000]
Mean of Dependent Variable
.031574
S.D. of Dependent Variable
.054622
Residual Sum of Squares
.022774
Equation Log-likelihood
76.0008
Akaike Info. Criterion
67.0008
Schwarz Bayesian Criterion
60.1322
DW-statistic
1.7895
*******************************************************************************
R-Squared and R-Bar-Squared measures refer to the dependent variable
dRPCC and in cases where the error correction model is highly
restricted, these measures could become negative.