CHAPTER FOUR

MODEL ANALYSIS AND ESTIMATION

4.1

INTRODUCTION

In this chapter, we present, analyse and interpret the results obtained from the estimation of our
models specified in the previous chapter. In order to achieve our stated objectives, this chapter
is sub-divided into three sections. Section 4.2 shows the trends and patterns of exchange
devaluation/depreciation and industrial performance in the Nigerian economy for the period
under study, while section 4.3 depicts the granger causality test and the regression analysis
using the ordinary least square method of estimation.
4.2

TRENDS AND PATTERN

4.3

ECONOMETRIC ANALYSIS
4.3.1

UNIT ROOT TEST

An empirical analysis of about the relationship between industrial performance and

depreciation/devaluation requires appropriate estimation techniques for both short run and long
run analysis. Thus, this study examines the properties of time series of the variables included in
our model and the extent of co-integration between the variables first. Then the long run and
the short run analysis are then analysed consequently. Table 4.1 presents the analysis of the
unit root test below, using Augmented Dickey Fuller (ADF), the analysis revealed that four of
the variables are stationary at level while three are not but stationary after differencing which
made them integrated or order one.
UNIT ROOT TEST: TEST OF STATIONARITY
Variable
ADF
LEVEL
1ST DIFFERENCE
VARIABLES
LNIND
-4.435883
-6.256497
DEPR

-4.4537564

-9.403113

Critical value

Remarks

1%= -3.600987
5%= -2.935001
10%= -2605836
1%= -3.605593

I(0)
I(0)

LNGDP

-2.351606

-5.903950

OPEN

3.083547

-6.441678

LNRES

-2.006019

-5.487124

INT

-2.138832

-6.819139

INFL

-3.424423

-6.15332

5%= -2.936942
10%= -2606857
1%= -3.600987
5%= -2.935001
10%= -2605836
1%=-3.605593
5%= -2.936942
10%= -2.606857
1%=-3.610453
5%= -2.938987
10%= -2.607932
1%= -3.600987
5%= -2.935001
10%= -2.605836
1%=-3.610453
5%= -2.935001
10%= -2.605836

I(1)
I(0)
I(1)
I(1)
I(0)

GROUP

Stationary at 5% level of significance.

Authors computation (2013)
4.3.2

GRANGER CAUSALITY TEST

Pairwise Granger Causality Tests

Date: 02/08/13 Time: 13:15
Sample: 1970 2011
Lags: 2
Null Hypothesis:

Obs

F-Statistic

Prob.

39

0.36526
0.53049

0.6967
0.5931

DEPR does not Granger Cause LNIND

LNIND does not Granger Cause DEPR
Authors Computation (2013)

From Table 4.2 above, the analysis showed that there industrial performance and currency
depreciation does not each other and thus we can conclude that there is neutral causality
between the variables given the high probability values which are greater than the 0.05 value
for the critical value.
4.3.3

CO-INTEGRATION TEST

As evident from the unit root test, the level of integration among the variables are mixed,
however, that does not stop us from performing co-integration because some the linear
combination of one or more of the variables might exhibits a long run equilibrium. In order to
capture the extent of co-integration among the variables, we utilized the multivariate cointegration methodology of Johansen. Using the trace statistic and the maximum Eigen value to

establish the number of co-integrating relationship among the variables, the results are depicted
in table 4.2. The co-integration results showed that the there are 5 co-integrating vectors among
the variables using the trace statistics while the maximum Eigen value revealed that there are
three co-integrating vectors among the variables using the 5% level of significance. Thus, the
results show that there exists a long run relationship among the variables in the model.
Johansen Co-integration Test
TRACE STATISTIC
NUL ALTERNATI STATIS
CRITICAL
L
VE
TIC
VALUE
r=0 r
205.39 125.6154
03
138.43 95.75366
r
r
74
90.310 69.81889
r
r
27
54.082 47.85613
r
r
73
32.832 29.79707
r
r
35
15.471 15.49471
r
r
92
3.4871 3.841466
r
r
08
Authors Computation (2013)

MAXIMUM EIGEN VALUE

NUL ALTERNATI STATIS
L
VE
TIC
r=0 r
66.962
87
48.117
r
r
12
36.227
r
r
53
21.250
r
r
38
17.360
r
r
43
11.984
r
r
81
3.4871
r
r
08

Dependent Variable: LNIND

Method: Least Squares
Date: 02/08/13 Time: 06:44
Sample (adjusted): 1971 2011
Included observations: 41 after adjustments

4.3.4

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
DEPR
LNGDP
OPEN
LNRES
INT
INFL

2.829089
-0.206149
0.109997
-0.009101
0.062307
0.016869
-0.002154

0.229967
0.113666
0.024888
0.004064
0.023580
0.004944
0.001131

12.30214
-1.813647
4.419599
-2.239378
2.642313
3.411709
-1.905208

0.0000
0.0786
0.0001
0.0318
0.0124
0.0017
0.0652

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood

0.843901
0.816354
0.108720
0.401885
36.63934

Mean dependent var

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

4.736597
0.253700
-1.445821
-1.153260
-1.339287

CRITICAL
VALUE
46.2314
40.07757
33.87687
27.58434
21.13162
14.26460
3.841466

F-statistic
Prob(F-statistic)

30.63499
0.000000

Durbin-Watson stat

1.311952

The regression analysis above examined the long run equilibrium. It shows the impacts of
depreciation/devaluation on industrial performance in Nigeria which is in line with the
realization of our objective. The regression result is presented below in form of equation. The
constant intercept of the equation is approximately 2.829089. This implied the proportion of
the industrial performance present irrespective of any of the explanatory variables in the model
i.e. depreciation, level of economic activity (GDP), degree of openness, (OPEN), the level of
foreign reserves (RES), interest rate (INT) and inflation rate (INFL). The result of the
regression analysis also showed that there is an inverse relationship between industrial
performance and depreciation of the Nigerian currency. This relationship showed that a 1%
decrease in currency depreciation leads to approximately 20.62% increase in industrial
performance. This finding is in tandem with a prior expectation which expects the relationship
between industrial performance and currency depreciation/devaluation to be negative. The
direct relationship between industrial performance and the level of economic activities in
Nigeria shows that a 1% change in economic growth leads to approximately 11.0% change in
industrial development. This a-prior effects is expected because the higher the economic
activities, the higher the level of industrial performance. Again, the relationship between
industrial performance and degree of openness showed that a 1% percent increase in trade
openness will decrease the level of industrial performance by appropriately 0.9%. Also, a 1%
increase in the interest rate proxy by the minimum rediscount rate, leads to 1.69% increase in
the level of industrial performance and a 1% percentage increase in the foreign reserves will
also have about 6.23% on the level of industrial performance. This positive relation is also
expected a priori. Moreover, a 1% increase in the inflation rate leads to approximately 0.22%
decrease in industrial performance. This inverse relationship is expected because inflation is a

macroeconomic instability that raises the cost of production and in turn lowers industrial
performance.
The t-values of the regression equation reveal that the constant intercept, the level of economic
activities, the degree of openness, amount of foreign reserves and interest rate are all
significant at the conventional 5% level of significance while currency depreciation and
inflation rate are significant at 7.86% and 6.52% level of significance. Another measure of
goodness of fit is the coefficient of determination which measures the amount of total variation
in the dependent variables explained by all the explanatory variables. This value (R 2) shows
that about 84.39% of the variations in the level of industrial performance are accounted for by
the joint linear influence of all the included explanatory variables in our model. The remaining
15.61% is accounted for by variables not included in our model. This measure of goodness of
fit is highly satisfactory. Also, the Durbin Watson (DW) statistic is approximately 1.31 which
suggests the presence of serial autocorrelation in our fitted model. This measure is not
satisfactory and it implied that our model cannot be used for prediction. Finally, the F-statistic
establishes that there is a linear relationship between the variables estimated given the value of
30.635 for the F statistic and a low 0.000 P-value.

4.3.5

ERROR CORRECTION REGRESSION ANALYSIS

Dependent Variable: D(LNIND)

Method: Least Squares
Date: 02/08/13 Time: 13:32
Sample (adjusted): 1972 2011
Included observations: 40 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
D(DEPR)
D(LNGDP)
D(OPEN)
D(LNRES)
D(INT)
D(INFL)

0.010805
-0.041413
0.030241
0.003316
0.032356
0.007434
-0.002224

0.015983
0.071475
0.045495
0.007215
0.024407
0.004767
0.000828

0.675991
-0.579403
0.664703
0.459595
1.325710
1.559280
-2.684415

0.5039
0.5664
0.5110
0.6489
0.1943
0.1288
0.0114

RESID_EQ08(-1)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

-0.422564
0.315049
0.165216
0.084992
0.231154
46.31344
2.102671
0.071993

0.157496

-2.683008

Mean dependent var

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

0.0115
0.021983
0.093023
-1.915672
-1.577896
-1.793543
1.655770

The error correction regression model above analyzed the short run equilibrium. The regression

result is presented above and it showed that the power of the explanatory variable (

is

relatively low (31.51%). This implies that the explanatory variables explained appropriately
31.51% variation in the level of industrial performance. Furthermore, the F statistics reflects
that the model does not fit the data relatively well at the conventional 5% level of significance
but at 7.19%, it does fit the data very well while the Dubin-Watson statistic (1.66) indicates
presence of autocorrelation. Also, the coefficient of the error correction term had the expected
negative sign and is significant at the 5% level of significance. This implies that the coefficient
of the error correction term correct about 42.25% of the disequilibrium toward the long run
equilibrium during a year.
In addition to the above, the coefficients of the individual variables are examined. The results
showed that the coefficients of both the differenced of both exchange rate depreciation and
inflation rate are negative but the coefficient of exchange rate depreciation is not significant
while that of inflation is significant at the 5% level of significance. The other variables have
positive relationship with industrial performance but these variables are not statistically
significant.

DATA
obs
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

EXC

GDP

INDGR

IND

INFL

INT

TRADE

0.714300
0.695500
0.657900
0.657900
0.629900
0.615900
0.626500
0.646600
0.606000
0.595700
0.546400
0.610000
0.672900
0.724100
0.764900
0.893800
2.020600
4.017900
4.536700
7.391600
8.037800
9.909500
17.29840
22.05110
21.88610
21.88610
21.88610
21.88610
21.88610
92.69340
102.1052
111.9433
120.9702
129.3565
133.5004
132.1470
128.6516
125.8331
118.5669
148.9017
150.2980

4219.000
4715.500
4892.800
5310.000
15919.70
27172.02
29146.51
31520.34
29212.35
29947.99
31546.76
205222.1
199685.3
185598.1
183563.0
201036.3
205971.4
204806.5
219875.6
236729.6
267550.0
265379.1
271365.5
274833.3
275450.6
281407.4
293745.4
302022.5
310890.1
312183.5
329178.7
356994.3
433203.5
477533.0
527576.0
561931.4
595821.6
634251.1
672202.6
718977.3
775525.7

NA
0.235502
0.200889
0.165556
2.478574
0.514594
0.227368
0.048110
-0.058208
0.201505
0.005454
7.154675
-0.065859
-0.135071
0.082274
0.092550
-0.026282
-0.015260
0.043509
0.103645
0.230067
-0.064973
0.014819
-0.003086
-0.023747
0.013256
0.063142
0.013780
0.011095
-0.062032
0.101286
0.054716
-0.037884
0.213067
0.044090
0.017092
-0.025106
-0.022340
-0.034143
0.020249
0.056316

41.10000
54.80000
62.30000
72.40000
76.20000
71.80000
85.50000
88.60000
90.40000
120.3000
119.0000
115.6000
122.9000
96.40000
91.60000
100.0000
103.5000
122.1000
108.8000
125.0000
130.6000
138.8000
136.2000
131.7000
129.2000
128.8000
132.5000
140.6000
133.9000
129.1000
138.9000
144.1000
145.2000
147.0000
151.2000
158.8000
145.1333
131.4667
117.8000
118.2300
122.0900

1.700000
1.600000
9.400000
4.600000
13.50000
33.90000
21.10000
21.50000
13.30000
11.60000
10.00000
21.40000
7.200000
23.20000
40.70000
4.700000
5.400000
10.20000
56.00000
50.50000
7.500000
12.70000
44.80000
57.20000
57.00000
72.80000
29.30000
10.70000
7.900000
6.600000
6.900000
18.90000
12.90000
14.00000
15.00000
17.80000
8.200000
5.400000
11.60000
12.40000
13.10000

4.500000
4.500000
4.500000
4.500000
4.500000
4.000000
3.500000
4.000000
5.000000
5.000000
6.000000
6.000000
8.000000
8.000000
10.00000
10.00000
10.00000
12.75000
12.75000
18.50000
18.50000
14.50000
17.50000
26.00000
13.50000
13.50000
13.50000
13.50000
14.31000
18.00000
13.50000
14.31000
19.00000
15.75000
15.00000
13.00000
12.25000
8.750000
9.810000
7.440000
6.130000

1642.100
2372.300
2424.300
3503.200
7532.100
8647.000
11899.60
14724.40
14276.10
18309.30
23282.30
23862.90
18976.90
16406.20
16266.30
18783.40
14904.20
48222.30
52638.50
88831.40
155604.0
211023.6
348762.9
384399.5
368848.0
1705789.
1872170.
2087379.
1589275.
2051486.
2930746.
3226134.
3256873.
5168122.
6589827.
10047391
10433200
12221711
15351293
13458920
19041169

2011

obs
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

153.8616

834161.8

NA

132.0300

12.10000

9.190000

24469229

LNIND

DEPR

LNGDP

OPEN

LNRES

INT

INFL

3.716008
4.003690
4.131961
4.282206
4.333361
4.273884
4.448516
4.484132
4.504244
4.789989
4.779123
4.750136
4.811371
4.568506
4.517431
4.605170
4.639572
4.804840
4.689511
4.828314
4.872139
4.933034
4.914124
4.880527
4.861362
4.858261
4.886583
4.945919
4.897093
4.860587
4.933754
4.970508
4.978112
4.990433
5.018603
5.067646
4.977653
4.878753
4.768988
4.772632
4.804758
4.883029

NA
-0.027031
-0.057152
0.000000
-0.044452
-0.022731
0.016919
0.031086
-0.066997
-0.017291
-0.090227
0.104262
0.093476
0.070708
0.053340
0.144216
0.557656
0.497100
0.114356
0.386236
0.080395
0.188879
0.427144
0.215531
-0.007539
0.000000
0.000000
0.000000
0.000000
0.763887
0.092177
0.087885
0.074621
0.064831
0.031040
-0.010242
-0.027170
-0.022399
-0.061284
0.203724
0.009290
0.023161

8.347353
8.458610
8.495520
8.577347
9.675313
10.20994
10.28009
10.35839
10.28235
10.30722
10.35923
12.23185
12.20450
12.13134
12.12031
12.21124
12.23549
12.22982
12.30082
12.37467
12.49706
12.48891
12.51122
12.52392
12.52616
12.54756
12.59047
12.61826
12.64719
12.65135
12.70436
12.78547
12.97896
13.07639
13.17605
13.23914
13.29770
13.36020
13.41831
13.48559
13.56130
13.63418

0.389215
0.503086
0.495483
0.659736
0.473131
0.318232
0.408268
0.467140
0.488701
0.611370
0.738025
0.116278
0.095034
0.088396
0.088614
0.093433
0.072361
0.235453
0.239401
0.375244
0.581589
0.795178
1.285214
1.398664
1.339072
6.061636
6.373445
6.911338
5.112018
6.571410
8.903205
9.036936
7.518113
10.82254
12.49076
17.88010
17.51061
19.26951
22.83730
18.71953
24.55260
29.33391

4.757376
5.302359
5.379713
5.689176
7.489619
8.225736
8.195342
8.032311
7.492894
7.604212
8.426649
8.451673
6.934426
6.392955
6.123895
6.889398
7.363178
8.558884
8.703215
8.205975
8.119032
8.306884
7.931163
8.497401
8.980184
7.899309
7.676923
8.720026
8.963766
8.577178
8.934688
9.237711
9.058588
8.941390
9.397877
10.09909
10.53092
10.72314
10.97632
10.70778
10.52824
10.39146

4.500000
4.500000
4.500000
4.500000
4.500000
4.000000
3.500000
4.000000
5.000000
5.000000
6.000000
6.000000
8.000000
8.000000
10.00000
10.00000
10.00000
12.75000
12.75000
18.50000
18.50000
14.50000
17.50000
26.00000
13.50000
13.50000
13.50000
13.50000
14.31000
18.00000
13.50000
14.31000
19.00000
15.75000
15.00000
13.00000
12.25000
8.750000
9.810000
7.440000
6.130000
9.190000

1.700000
1.600000
9.400000
4.600000
13.50000
33.90000
21.10000
21.50000
13.30000
11.60000
10.00000
21.40000
7.200000
23.20000
40.70000
4.700000
5.400000
10.20000
56.00000
50.50000
7.500000
12.70000
44.80000
57.20000
57.00000
72.80000
29.30000
10.70000
7.900000
6.600000
6.900000
18.90000
12.90000
14.00000
15.00000
17.80000
8.200000
5.400000
11.60000
12.40000
13.10000
12.10000