Correction Econometrics is the paper you need to rewrite. This paper has comment from the proffesor follow it and fix it.
Also there is a copy from another writer(Tri Nguyen) thats just an example of a A+ graded
paper.
INTRUCTIONS:
In this
exercise, we will reproduce the model used by Xu (2000). This model has the
great virtue of involving only 3 variables. Also, it gives us an estimate of
the impact of financial development on growth in each country, so that we can
see whether a particular country fits the general pattern found in
cross-country studies.
At the
same time, this method has two weaknesses. First, it does not give us any
insight into whether any other variables might affect the finance-growth
relationship. As we will see, countries have fairly different responses to
financial development. The Xu model does little to explain this.
Also, the
Xu model does not allow us to make precise statements about whether finance
promotes growth worldwide. We can count which countries have positive or
negative impacts, but it is hard to find a meaningful way to go from these
individual country cases to the whole picture. In some countries, the impact is
small, whether positive or negative, while in others it is large.
How we will apply the
model: Xu’s
model involves running a Vector Autoregression, which is a set of 3 regressions
like this:
FDt =
a + a1 FDt-1 + a2 FDt-2 + a3 g(GDP)t-1 + a4 g(GD)t-2
+ a5 g(I)t-1 + a6 g(I)t-2 + e
g(GDP)t
= b + b1 FDt-1 + b2 FDt-2 + b3 g(GDP)t-1 + b4 g(GD)t-2
+ b5 g(I)t-1 + b6 g(I)t-2 + e
g(I)t = c + c1 FDt-1 +
c2 FDt-2 + c3
g(GDP)t-1 + c4 g(GD)t-2 + c5
g(I)t-1 + c6 g(I)t-2 + e
where FD
is the financial development index, g(GDP) is the growth rate of real GDP, and
g(I) is the growth rate of real fixed capital investment.
Once these
regressions are run and the coefficients are estimated, we can calculate
Impulse Response Functions that summarize the way the variables affect each
other in this complicated system of equations. The beauty of the VAR is that we
simply allow for all of the variables affecting each other. So we do not try to
figure out which variables are endogenous and which are exogenous; we basically
assume that they all affect each other, and let the data and the model estimate
the overall effect of each variable on the other. The VAR model takes for
granted that financial development affects growth and that growth affects
financial development.
So, in the
end, the Impulse Response Function will tell us the two things Xu calculates:
the short-run impact of a change in Financial Development on GDP and Investment
growth, and the long-term impact as well.
Software: This project can be done in Stata or
other econometric software packages. The AU Center for Teaching, Research and
Learning (CTRL) can provide help on STATA.
I can
provide do files for Stata, or you can use this project as an occasion to
improve your STATA skills.
Choice of countries,
further research and write-up:
Choose 5
countries to study, and follow the steps above to generate the Impulse Response
Function graphs and tables. Make a table with the values of both the short-run
and long-run impact elasticities for GDP and Investment growth for your 5
countries.
To get
more insight what might be behind the results you find, look at the following
factors for each of your countries:
1) How
rapid was real GDP growth? What was the average growth rate?
2) Were
there any periods of deep recession during the period studied? Note that STATA
only puts years in which all variables have data into the regression. When you
look at the VAR coefficient estimations, you will see how many years STATA took
into account. You can also tell this by looking at the Excel file. The series
on FD only has values from 1980 to 2008 in most cases, but sometimes the time
period covered is even shorter.[1]
3) Did the
country suffer any banking crises in the period you are looking at? Consult
Laeven and Valencia (2012) for a list of banking crises. How might a banking
crisis affect the ratio of deposits/GDP. (Hint: think about what happens to
confidence in the banking system during a crisis.)
4) Did the
country experience high inflation in the period you are looking at? Go to the www.worldbank.org and use the databases there, or
the IMF’s International Financial Statistics (available through the IMF
e-library, which you can access through the AU library) and create a table or
graph of inflation rates. (Hint: what does high inflation do to people’s
willingness to hold money or bank deposits? What is the relationship between
high inflation and holding money or deposits in foreign currencies? How would a
switch to foreign currencies affect deposits/GDP?)
Briefly
explain your findings regarding the relationship between financial development
and growth for your countries in about 5 pages of text. Consult sources about
the economies you have chosen to ensure that you fully understand the context,
and include references in the text and the sources in your bibliography.
Note that
your results will not exactly coincide with Xu’s. He used data from 1960 to
1993, and you will have data from 1980 to 2008.
[1] Data for this exercise was gathered
from the World Bank website. For reasons that remain unclear, data on currency
in circulation, which is required for computing the Financial Development
Index, was unavailable on that website and on the IMF’s website, even though it
has been published in print form in the past. Through contact with the IMF
Statistics Department, I was able to get data for some countries on currency in
circulation going back to 1980, but the data are incomplete for many countries.
This is not unusual when using cross-country data.
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