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The impact of monetary policy on consumer price index (CPI): 1985-2010

par Sylvie NIBEZA
Kigali Independent University (ULK) - Master Degree 2014

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3.4 Estimation techniques

This study employs the ADF and Johansen as a test of stationality, cointegration test and modeling. They are all adopted in order to arrive at a conclusion that will be free from any doubt and this can lead to the acceptance of conclusions and recommendations of the present research.

3.4.1 Unit Root Test

Consider the model:

The Stationarity condition is |ö| < 1. In general we have three possible cases.

|ö| < 1 and therefore the series are stationary.

|ö| > 1where in this case the series explodes.

ö = 1 where in this case the series contains a unit root and is non-stationary.

For testing that is there any unit roots in the series the Augmented Dickey-Fuller test for unit roots will be used.

The Augmented Dickey Fuller (ADF) test will be employed as a prior diagnostic test before the estimation of the model to examine the stochastic time series process properties of monetary policy and Consumer price index. This enables us to avoid the problems of spurious result that are associated with non-stationary time series models.

3.4.2 Co-integration Test

This is employed to determine the number of co-integrating vectors methodology with two different test statistics namely the Trace test statistic and the Maximum Eigen-value test statistic.

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