UNEMPLOYMENT AND

INFLATION IN THE U.S.

(1959-95)
An Econometrics analysis

BETTINA DALESSANDRO
Sdertrns hgskola
Advanced Econometrics

Introduction

In this paper it will be analyzed the annual data for the United States
of America on unemployment and inflation, by Ramanathan, which data set
in available on data examples on the Gretl software. The source is 1996
Economic Report of the President. The analysis will use the following
variables year: 1959-95, unemp: civilian unemployment rate, cpi:
consumer price index, infl: percent change in CPI (inflation rate), wggr:
percent change in average weekly earning, in current dollars.

Using the Gretl software, it is aimed in this paper to look for

multicollinearity, heteroscedasticity, autocorrelation, cointegration, etc. To
reach this knowledge, models as ARCH and GARCH, OLS plus the following
tests Durbin Watson d test, Unit root, Engle Granger, and others shall
be used.

Regarding the nature of the data, the type used will be Time Series. It
is a set of observations that a variable takes at different times, such as
daily (e.g. stock prices, weather reports), weekly (e.g. money supply),
monthly (e.g. the unemployment rate, the consumer price index CPI.
Succesive observations may be correlated, leading to problems for the
regression, one of them being autocorrelation, which shall be analyzed and
discussed later in this paper. To estimate the linear regression model, the
Ordinary Least Squares shall be used.

OLS Model: The Ordinary Least Squares model is a special case of

the generalized least square methods (GLS), consists in one of the simplest
methods of linear regression. This model may be used on single or various
explanatory variables, even categorical explanatory variables. It is a method
commonly used to estimate the regression coeficients.

Analising the dependent variable l_wggr to the independent variables

l_infl, l_unemp and constant it is visible that, according to the p-value, the
const has 1% of signifcation and the l-infl 1% also, when the l_unemp is non
important. Therefore, it is clear the unemployment does not affect the
wages, but the inflation does.

Multicollinearity:

According to Gujarati, one of the basic

assumptions in the classical linear regression model is when there is no

exact linear relationship between the regressors. In this case, if one or more
of this relationships are among the regressors, there is the presence of
multicollinearity. Multicollinearity may occur when two or more variables in
the econometric model are correlated leading to redundant information.

As the minimum value possible is of 1, l_infl and l_unemp have 1,055

in this case as the values are really near the minimum possible, the
existence of multicollinearity is denied.

Heteroscedasticity: It may occur in the presence of outliers,

specification errors, and omission of relevant variables or asymmetry in the
distribution of one or more of the regressors. Heteroscedasticity happens
when the variance of Y|X is not constant.
Using the Whites Heteroscedasticity Test, Gretl gives the information
that Heteroscedasticity is not present in the model.

Teste de White para a heteroscedasticidade Hiptese nula: sem heteroscedasticidade

Estatstica de teste: LM = 6,18785
com p-valor = P(Qui-quadrado(5) > 6,18785) = 0,288367

Autocorrelation: One of the assumption regarding the classical

linear regression model is that the error terms are uncorrelated. When the
error terms are correlated, we have a problem called autocorrelation. It has
consequences as: unbiased and consistent OLS estimator, it is still normally
distributed but no longer efficient no longer the best linear unbiased
estimator.
Using the Durbin Watson d test, tests the null hypothesis the
residuals from the OLS regression are not autocorrelated against the
alternative that the residuals follow an AR1 process. The value of the
statistic is from 0 to 4. Values near 2 means non-autocorrelation, towards 0
means positive autocorrelation and towards 4, negative autocorrelation. The
result of the Durbin-Watson test is 0,925 leading to a result near to
positive autocorrelation, but really in the area of no decision.

Endogeneity: There are three ways that a model can have

endogeneity the most common way in when one of the regressors is
actually dependent or related with the error,

or another common

endogeneity case is when the regressor does not only explain the
dependent variable but is also explained by the dependent variable, this is
called simultaniaty.

The analysis starts by using OLS in two stages, when I will select
l_unemp as to be tested to see if it is endogenous. The result tell us that
although not very significant, there is endogeneity in the model.

Teste de Hausman Hiptese nula: as estimativas por MQO so consistentes

Estatstica de teste assinttica: Qui-quadrado(1) = 23,5144
com p-valor = 1,23983e-006

Stationarity: The Augmented Dickey Fuller test will be used, the

model test whether a unit root is present in an autoregressive model. Using
the Dickey Fuller test to detect stationarity with l_wggr, we receive the
following results:
Coeficient l_wggr_1 = - 0,228889 meaning that the series is not
non stationary
t ratio - l_wggr_1 = -2,031 as tao is more negative, the series is
stationary
p value l_wggr_1 = 58% more or less this show that the model is
nonstationary.

Cointegration: The economic interpretation of cointegration is that

if two or more variables possess a long-term equilibrium relation, even if the
series has stochastic tendencies (non-stationary), they will move together

on time and the difference will be stable, or stationary. Cointegration means

the existence of a long-term equilibrium, to which the economic system
converges on time.
To look for cointegration in this series, the Engle Granger test is to be
used. According to the Gretl software, used to analyze the econometric
properties on this paper, there is evidence for a cointegrating relationship if:
The unit-root hypothesis is not rejected for the individual variables or if the
unit-root hypothesis is rejected for the residuals from the cointegrating
regression. According the p-value provided by gretl, p-value = 0,02004, the
null of unit root for the residuals can be rejected.

Normality of residuals: To check for normality of residuals the

Jarque-Bera test shall be used. It is used to check hypothesis about the fact
a given sample is a sample of normal random variable with unknown mean
and dispersion.

Using the Jarque-Bera test for normality of residuals we get that for
the test of null hypothesis of normal distribution:

Chi-squared(2) = 0,731 with p-value 0,69373

ARCH and GARCH:

GARCH (generalized ARCH) model is a generalization of ARCH models
proposed by Bollerslev (1986). The difference between the models is an
additional component, on the conditional variance in previous moments. The
advantage of GARCH is that it can be used to describe volatility with less
parameters than an ARCH model.

const
alpha(0)
alpha(1)
beta(1)

Modelo 7: GARCH, usando as observaes 1959-1995 (T = 37)

Varivel dependente: l_wggr
Erros padro baseados na Hessiana
Coeficiente Erro Padro
z
p-valor
1,25146
0,0695073
18,0047
<0,00001
0,0571652
0,642337
0,0806207

Mdia var. dependente

0,0391259
0,346292
0,318482

1,434955

1,4611
1,8549
0,2531

D.P. var. dependente

0,14400
0,06361
0,80016

***
*

0,440177

Log da verossimilhana
Critrio de Schwarz

20,01082
58,07623

Critrio de Akaike
Critrio Hannan-Quinn

Varincia do erro incondicional = 0,206341

Bibliography

50,02165
52,86127

Gujarati, Damodar Econometrics by Example, 2011

Lin, Xiang - GRETL_EconometricsII_2014_Autumn.pdf, 2014