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Are Real Devaluations Contractionary? Empirical Strategy 2

Are Real Devaluations Contractionary? Empirical StrategyBernhardsen and Gerdrup mentioned that interest rate (igt) is an important monetary policy instrument and it can result in the contraction or expansion of output in an economy. The results showed that igt has a significant contemporaneous relationship with the ygt, however with unexpected positive sign. Another, variable, included in the model is the inflation rate (ngt). The results showed a significant positive and lagged relationship of the ngt with the ygt. At ngt-2 it showed a negative relationship with the ygt, but at ngt-1 ngt-3 and ngt-4 its sign is positive. Although at ngw it remained insignificant yet it has been included in the model for handling model specification problems. Overall, it has been found that ngt has a positive relationship with the ygt. This result is in line with the results of Barro, Gylfason and Herbertsson and Guerrero who also concluded that inflation put contractionary effects on the output in an economy. Similarly, the lags of the dependent variable have also been included in the model to know whether ygt is also determined by its past values or not. The results showed that at ygt-1 and ygt-3 it showed a positive whereas at ygt-2 it showed a negative relationship with the ygt.

However, overall it put positive effects on the ygt. Although the adjusted R2 value showed that the explanatory power of the regressors in the model is reasonable, however, the wrong sign of the igt and the small value of the Durbin Watson value is 1.59 which shows that there might be some missing values in the model, which are require to be considered. These results has been confirmed with the post diagnostic i.e. Q-statistic, LM statistic and CUSUM square stability tests i.e. CUSUM and CUSUM square tests. direct lenders for payday loans

Table 2 present the results for the open economy model. Here, qgt with two additional variables tbgt and frgt have been included in the model. The main purpose here is to find out whether real exchange rate (qgt) has a positive or negative relationship with the ygt. The results showed that with the inclusion of the additional variables igt showed a negatively significant relationship with ygt which is according to the expectations. This result of the igt is in contrast with the previous result given in table 1. Here, igt showed both a contemporaneous and lagged relationship with ygt. However at igt, igt-3, igt-4 it showed a significant and negative impact on ygt, and at igt-1, igt-2 it showed a positive relationship with ygt. However, overall its overall impact on the ygt is negative. One possible explanation for this negative impact of igt on ygt is that when the monetary authority following the Taylor rule increases the igt, it attracts the foreign capital inflow in the country which helps in the contraction of the igt through different channels i.e. growth in the domestic investment activities etc.
Similarly overall ngt is still having a positive relationship with the ygt. However, its impact in terms of quantity and significance is slightly higher than before. Similarly the interest variable qgt also showed a positively significant relationship with the ygt at qgt-1 and qgt-2. This positive relationship of the qgt with the ygt justifies our hypothesis that a real depreciation put expansionary effects on the output gap. This result is also similar to the theoretical and empirical conclusions of Alejendro, Branson, Lizondo and Montiel.

This post was written by , posted on May 8, 2014 Thursday at 11:28 am