Analysis of Monetary Policy and Inflation Evidence From Uzbekistan's Macro Economy

Analysis of Monetary Policy and Inflation:

Evidence from Uzbekistans Macro Economy

BY

Salimov Khondamir Makhamadjonovich

A thesis submitted in partial fulfillment of the

requirements for the degree of

MASTER OF ARTS IN

INTERNATIONAL DEVELOPMENT

at the

INTERNATIONAL UNIVERSITY OF JAPAN

2010

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The thesis of Salimov Khondamir Makhamadjonovich is approved by the Thesis Examining Committee.

_______________________________ Professor Ching-Yang Lin (Examiner)

_______________________________ Professor Hiroaki Miyamoto (Supervisor)

INTERNATIONAL UNIVERSITY OF JAPAN

2010

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ABSTRACT OT THE THESIS

Analysis of Monetary Policy and Inflation: Evidence from Uzbekistans Macro Economy

by

Salimov Khondamir Makhamadjonovich

Master of Arts in International Development International University of Japan, 2010

Professor Hiroaki Miyamoto, Supervisor

This thesis studies the effect of monetary policies on price levels in Uzbekistan for

the period between 1995 and 2009. We employ three alternative time series analyses

and examine the relationship between output, price levels, exchange rates, and

money supply in Uzbekistan. Empirical results demonstrate that current inflation

rate is explained not only by money supply but also by other monetary factors, such

as the exchange rate, interest rate, foreign price levels or output growth. This study

shows that for the realization of an effective anti-inflationary policy, other monetary

factors also need to be watched.

Key words: Monetary Policy, Price levels, Inflation Rate, Vector autoregression.

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TABLE OF CONTENTS Page

Abstract.. iii

List of Figures v

List of Tables. vi

Acronyms... vii

Acknowledgements... viii

Chapter 1: INTRODUCTION__________________________________ 1

Chapter 2: OVERVIEW OF MONETARY POLICY IN THE

REPUBLIC OF UZBEKISTAN______________________

3

2.1- Monetary Policy and Growth of Uzbekistan in General.......... 3

2.2- Historical relationship between inflation, Money growth, GDP growth and exchange rates in Uzbekistan.....

7

Chapter 3: LITERATURE REVIEW____________________________ 11

3.1- Determinants of Inflation in Theory.... 11

3.2- Empirical Studies on the inflation-growth relationship... 12

3.3- Nexus of Monetary Policy and Price Levels... 15

Chapter 4: FRAMEWORK OF ANALYSIS AND

EMPRICAL ESTIMATION_________________________

18

4.1- Model Specification and Data.. 19

4.2- Data Analysis...... 24

Chapter 5: EMPRICAL RESULTS AND POLICY IMPLICATIONS_ 32

Chapter 6: CONCLUDING REMARKS_________________________ 33

APPENDICES_______________________________________________ 36

BIBLIOGRAPHY____________________________________________ 39

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LIST OF FIGURES

Page

Figure 1:

Money Supply and Price Level Dynamics of Uzbekistan in 1995-20098

Figure 2:

Inflation and Money Growth Dynamics of Uzbekistan in 1995-2009..........8

Figure 3:

Dynamics of GDP growth and Inflation in Uzbekistan (1995-2009)........9

Figure 4:

Impulse Response Function Results..28

Figure 5:

Accumulated Impulse Response Function Results .30

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LIST OF TABLES

Page

Table 1: Refinancing Rate of the CBU (1994-2009)..4

Table 2: GDP - real growth rate (%) 2009 Country Ranks.....6

Table 3: Descriptive Statistics ...24

Table 4: Unit Root Test results...25

Table 5: Johansen Cointegration Test.....25

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ACRONYMS

APEC Asia Pacific Economic Conference CB Central Bank CBU Central Bank of Uzbekistan CIS Commonwealth of Independent States CPI Consumer Price Index FSU Former Soviet Union GDP Gross Domestic Product GNP Gross National Product IMF International Monetary Fund IRF Impulse Response Function OECD Organization for Economic Co-operation and

Development OLS Ordinary Least Squares PPP Purchasing Power Parity USD United States Dollars UZS Uzbek soum VAR Vector Auto Regression VECM Vector Error Correction WPI Wholesale Price Index WTO World Trade Organization

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ACKNOWLEDGMENTS

First, and above all else, I would like to thank to our Almighty for His blessing,

guidance and love. It is through His mercy that I have been able to succeed this far.

Taking this opportunity I would like to thank several people who have a

significant impact in my life at IUJ and writing this thesis. First and foremost, I am

indebted to my supervisor Professor Miyamoto Hiroaki and to my thesis examiner

Professor Lin Ching-Yang for their invaluable comments and suggestions which

improved this work.

Other than that, I would like to express my sincere appreciation to Japan Grant

Aid for Human Resource Development (JDS) program, for affording me the

opportunity to come to IUJ to study.

I would like to extend my appreciations to all the teachers in IUJ and in my

previous study for their invaluable knowledge transfer during my life.

I am also indebted to my friends, for their constant support and encouragement.

To all Yamato-machi people for their hospitality that made my stay in Japan more

enjoyable.

Last but not least, I am forever indebted to my parents, especially to my father

Mahammadjon Ahmadjonovich Salimov (May Allah have mercy on him) and other

members of my family for their spiritually support and very useful advices for life.

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Chapter 1: INTRODUCTION

In developing countries and countries in transition to market economy, the

primary goal is to achieve the stability of an economy by maintaining low inflation

rate and stabilizing prices. In Uzbekistan, the unmanageable growth of the price

level is one of the most important issues on the way of economic reforms.

Uzbekistan experienced hyperinflation in 1994 and the growth rate of price levels

exceeded 1200 percent per year.1 High level of inflation has a negative impact on

production, and leads to decreases in investment, overflows of banking speculation

and trade. In order to stabilize the price level, it is well known that monetary

policies play an important role.2 However, the effect of monetary policies on price

levels in Uzbekistan has not been studied in the formal framework.3

The purpose of this paper is to study the effect of monetary policies on price

levels in Uzbekistan. In particular, this study evaluates the effectiveness of monetary

policy in controlling the inflation. For this purpose, I employ three alternative time

series analyses and examine the relationship between price levels, exchange rates,

and money supply in Uzbekistan.

1 This inflation rate was one of the highest among Central Asian countries and was the highest value after 1991 in Uzbekistan. 2 Monetary policy represents a set of interconnected measures undertaken by the Central Bank with aim to regulate business activity through planned influence on loan and money circulation. Keeping reasonable levels of price stability has been a main target of monetary policies in Uzbekistans economy. 3 Before the transition period to market economy, Uzbekistan was in planned economic system. Hence, there was no reason to consider stabilizing the price levels.

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Empirical results do not show a clear relationship between money supply and

the price level. This implies that the central bank of Uzbekistan has not succeeded

controlling price level by controlling money supply. However, if we take a look to

the data, we can see the same upward trends for both money supply growth and

price level4

The remainders of this paper are organized as follows. Second chapter explains

the overview of monetary policy, growth and price levels of the country in general.

Third chapter discusses literature review on determinants of inflation in theory and

empirical studies on relationship between inflation and monetary policy. Framework

of the analysis is clarified in the fourth chapter and data analysis, model

specification and methodology are explained. In the fifth chapter, empirical results

and discussions are explained. Finally, chapter six presents policy implications and

gives some concluding remarks.

. Therefore, we analyzed the effect of exchange and interest rates to the

inflation as well. In contrast, there are short term and long term effects of foreign

price level, interest rate and exchange rate movements to the inflation rate.

4 See Figure 1 for the detail.

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Chapter 2: OVERVIEW OF MONETARY POLICY IN THE REPUBLIC OF

UZBEKISTAN

2.1 Monetary Policy and Growth of Uzbekistan in General

Monetary policy plays a key role in achieving macroeconomic stability in

developing countries and countries in transition to market relations as well, where,

as we know, there is instability in key macroeconomic indicators, especially in

inflation.

It is obvious that an important advantage of monetary policy is the flexible and

quick impact on the economic condition of the country. The results of this monetary

policy immediately affect the financial condition of the country. This is especially

important in the application of immediate measures to fight against inflation. Thus, I

tried to pay more attention to the Central Banks instruments of monetary control

and their effectiveness in the short-run and long term.

In the initial stages of the transition to market economy, like many other CIS

countries Uzbekistan also faced macroeconomic issues such as: recession, rising

unemployment and inflation rates, shortage of financial resources, the budget deficit.

By ensuring price stability, monetary policy creates conditions conducive to

economic growth, strengthens the macroeconomic and financial stability of the

country. To prevent the growth of macroeconomic issues and to achieve the stability

Uzbekistan had to develop a special program of stabilization, to introduce its own

national currency and select the instruments of monetary policy.

Introduction own national currency in 1993-1994s marked as the beginning of

the economic development of the republics own domestic monetary policy.

Proceeding from the conditions of the initial phase of reforms, Uzbekistan clearly

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identified the tactical and strategic objectives of monetary policy. The strategic goal

of the Central Bank of Uzbekistan (CBU) was to employ standard instruments of

monetary regulation which were characteristic of developed countries. However, in

many developing countries in the early transition stage they prevented the use of

tools specific to market economy.

Taking into account these realities, CBU decided making a radical change in

monetary policy, such as, rebuilt credit and interest rate policy in order to reduce the

monetary channels of the inflation. To achieve this goal, the CBU applied the tools

of refinancing which is interest rate policy. In 1994-1995s CBUs refinancing rate

increased as follows. Since October 1994 150%, from January 1995 225%, from

1st of March 1995 300% then from second half of 1995 it decreased to 84% and

gradually decreased to 14% in 2009.

Table 1: Refinancing Rate of the CBU (1994-2009)

1994 1995 1996 1997 1998 1999 2000 2001 225.0 84.0 48.0 30.0 36.0 36.0 24.0 24.0

2002 2003 2004 2005 2006 2007 2008 2009 30.0 24.0 18.0 16.0 14.0 14.0 14.0 14.0

Source: CBU

Between the short terms, applying costly money policy by CBU led to reduce

bank lending this is consequently led to decrease in investment activity that in turn

resulted a decline in production. On the other hand, there were long-term goals of

this monetary policy of CBU such as reducing inflation and strengthening the

national currency.

From the second half of the 1994, interest rate policy of CBU has changed.

Mostly, it focused on two interrelated goals: keeping the level of monetary

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indicators at specified rate and liquidity of the banking system and secondly,

achieving and maintaining the macroeconomic stability.

Benchmarking the reserve requirements for banks was a process in transition to

market relations and one of the main economic instruments for implementing

monetary policy. Interest rate and rate for reserve requirements rose in 1994.

The purpose of introducing these changes was the adaptation of reserve

requirement tools for monetary development in order to prepare for the introduction

of its own national currency. Therefore, CBU increased the rate of reserve

requirements in order to reduce the money supply. The funds attracted for up to 3

years term the rate is set at 30%, and for a period exceeding 3 years -10%. With the

improvement of market relations and the use of government securities, the interest

rate and reserve requirements in subsequent years were significantly reduced.

History shows that monetary policy carried out by CBU to curb the growth of

the monetary base, currency in circulation result a downward trend in inflation. If

the annual growth rate of money supply in 1995 was 2.6 times that in the subsequent

years of 1996, 2000, 2005, and 2009 were 2.2, 1.5, 1.3, and 1.4 respectively. The

level of annual CPI reached more than 12 times between the periods 1992-1996,

however, in 2002 this rate reduced to 20%. Consequently this process positively

affected the dynamics of interest rates in the money market and exchange rate in the

domestic market.

Next steps of CBU were associated with exchange policy of foreign currency.

In 2004, as a result of foreign exchange liberalization, by introducing the

convertibility of national currency the amount of the transactions on the domestic

market increased significantly. In 2009, main reforms and development programs

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effectively realized. Gross Domestic Product improved by 8.1%, industrial output -

by 9.0%, agriculture by 5.7%, investment by 9.1%, trade by 16.6% and

services by 12.9%. According to the Table 2 below, annual GDP growth rate of

the country was higher than growth rates in Russia (6.0%), Moldova (7.3%),

Kazakhstan (3.0%), Ukraine (2.1%) and Tajikistan (7.9%). In 2009, Uzbekistans

position was fourth in terms of growth of GDP among FSU countries after

Azerbaijan (11.6%), Turkmenistan (10.0%) and Belarus (9.2%) and 9th in the world.

Table 2: GDP - real growth rate (%) 2009 Country Ranks

Rank Country GDP Growth,% 1 Macau 15.0 2 Angola 13.2 3 Azerbaijan 11.6 4 Qatar 11.2 5 Anguilla 10.2 6 Turkmenistan 10.0 7 China 9.8 8 Belarus 9.2 9 Uzbekistan 8.9 14 Tajikistan 7.9 30 Russia 6.0 48 World 3.8 55 Kazakhstan 3.0 64 Ukraine 2.1 72 US 1.3 75 EU 1.0

Source: CIA World Fact book 2009

Furthermore, in 2009 accelerating economic growth also accomplished by a

effective and balanced fiscal and monetary policies. The budget surplus amounted

0.5% of GDP. Producers tax burden has been reduced. The result of tight monetary

policy led to decrease inflation level up to 7.4 percent.

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The CBU conducted intensive monetary policy in last recent years and one of

the main goals of the CBU was to strengthen the purchasing power of the currency.

To maintain the sustainable levels of national currency, the CBU implemented a

tight monetary policy and decreased the impact of monetary factors on price levels.

2.2 Historical relationship between inflation, Money growth, GDP

growth and exchange rates in Uzbekistan

In this part our objectives are analyzing the relationship between inflation and

GDP growth and money supply growth in periods from 1995 to 2009. When

monetary or fiscal policy are not stable, the economy of the country suffers from

serious macroeconomic imbalances such as rising inflation and money supply,

multiple exchange rates which overvalue the currency, a distorted interest rate

regime, unreliable statistics and an inability to resolve national accounts to

determine a realistic GDP figure. According to quantity theory of money, the money

supply and inflation have a positive relationship in terms of increase in the money

stock and increase in the price level.

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Figure 1: Money Supply and Price Level Dynamics of Uzbekistan in 1995-2009.

Figure 1 above is consistent with quantity theory of money, which we can see

the relationship between money supply and price levels is positive. Money supply

gradually increased year by year, simultaneously, inflation rate has a upward trend

in this period of time.

Figure 2: Inflation and Money Growth Dynamics of Uzbekistan in 1995-2009

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

0.0

500.0

1000.0

1500.0

2000.0

2500.0

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58

UZS

CPI

, 199

4=10

0

Price Level Money Supply

BlnU

ZS

Quarters (1995-2009)

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59

Date, I/1995-IV/2009

%

Infl, % M2 Gr, bln UZS

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However, if we take a close look to Figure 2, we can see the negative link

between price levels and money growth as well. Maybe this is because of there are

some other factors affecting the inflation rate more than money supply. Under

normal conditions, relationship between money supply and inflation is not

immediate and so we should not expect all outcomes of currently implemented

monetary policy actions to happen in the same current period. The thing for

Uzbekistan is the time it takes a change in money stock to start affecting on inflation.

Simultaneously, if we take look to Uzbekistans GDP growth-inflation relations, we

can see the similar pattern between these two variables.

Figure 3: Dynamics of GDP growth and Inflation in Uzbekistan (1995-2009)

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1 3 5 7 9 11131517192123252729313335373941434547495153555759

Infla

tion,

%

Date Infl, % Real GDPSA Gr,bln UZSIU

J INT

ERNA

L USE

ONL

Y

10

Figure 3 demonstrates the dynamics of inflation and GDP growth which are

moving inversely between these years. The possible reason maybe is the impact of

the current inflation happens after some time later.

Thus, one of the objectives of this study is to determine these time lags in order

to estimate the future inflation levels.

In 2009, the exchange rate of UZS against USD depreciated by 8.5% in

comparison with 2008. The depreciation of the exchange rate indicates positive

expectations of market participants. It also indicates that, market demand for foreign

currency was lower than previous years.

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Chapter 3: LITERATURE REVIEW

In this section, we introduce the other theoretical research papers and analytical

studies on this topic. In order to understand consequences and sources of inflation

clearly, it is better to explain theoretical background of the monetary policy and

inflation. Even though some studies contradict each other, there is vast literature on

relationship between inflation, monetary policy and prices.

3.1 Determinants of Inflation in Theory

One of the best known economics scholars Friedman Milton said, The only

cure for inflation is to reduce the rate at which total spending is growing.5 In his

work he emphasized that monetary measures have more considerable and reliable

effects than fiscal policies on total spending. Actually, he offered the finding, I

dont think monetary policy has to be backed up by fiscal policy at all. I think

monetary policy can curb inflation.6 Friedmans logic behind this was simple: A

budget deficit is inflationary if, and only if, it is financed in considerable part by

printing money 7

5 The only cure for inflation...: Friedman Newsweek column, November 12, 1979.

explicitly, only if fiscal policy decisions are made by the

monetary authorities. He offered the policy implication on the importance of

monetary actions for total spending, and aggregate spending for inflation as:

Monetary policy is an appropriate and proper tool when directed at achieving price

6 See Friedman interview in New Zealand Herald (1981) for the detail. 7 See Friedman interview in Chicago Daily News (1970) for the detail.

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stability or a desired rate of price change.8

Perhaps, Phillip Cagan is famous for a work which tried to identify the

fundamental relationships between output, money and prices. In his work

Nowadays this theory motivates the

monetary policy framework of main economies.

9

he tried

to analyze the hypotheses such as, Inflation process is self-generating and

Increase in price levels caused by money supply expansion during

hyperinflationary period. After the publication of Cagans work, many famous

economists either developed or repeated analyze of the Cagans Model. Particularly

Barro (1970), Sargent (1977), Frenkel (1975), Abel (1979). Moreover, nowadays

economists in monetary field frequently refer to his Demand function while

analyzing value of money.

3.2 Empirical Studies on the inflation-growth relationship

In general the relationship between long-run growth and inflation is negative.

However, some empirical researches give variety of results, thus it is hard to say

there is a negative long-run relationship because in the short-term a Philips curve

occurrence can lead to a positive relationship between economic growth and

inflation. There have been a huge number of researches from best known scholars

provided negative relationship. Particularly, Barro (1997) found an empirical result

that inflation behavior has a negative relationship with economic growth. The paper

written by Barro covered more than 100 countries between the periods 1960-1990

and the results show that increase inflation by 10 percent leads to decrease in growth

8 See Friedman in Federal Reserve Bank of San Francisco Economic Review, (1977). 9 See Cagan, Phillip (1956) for the detail.

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of GDP per capita by 0.2 0.3 percent per year. Moreover, he suggested that

although the effect is very small, the long-run influences on living standards are

significant. For example, monetary action that increases long-run inflation rate by 10

percent per year lowers the Real GDP levels 4-7 percent after 30 years which

justifies strong attention to price stability.

Lately, Bruno and Easterly (1998) have provided some clarification and

concluded that the negative relationship between growth and inflation is caused by

high inflation crises, for the periods when there is inflation rate is above 40 % per

year.

However, in early empirical researches around 1960s on inflation and economic

growth were ambiguous like theory. Studies of International Monetary Fund (IMF)

Papers about that period didnt identify any relationship between inflation and

economic growth.10 Although inflation rate in Latin America reached more than 10

percent in 1950s and 1960s their growth was good. For example, Brazil is often

referred to as high inflation and high growth counterexample to outdated view that

inflation is bad for the economy11. Wallichs (1969) findings are also interesting. He

used cross section analysis of 43 countries, with pooled data for the periods 1956-65.

Like other literatures of that time he also had expected positive relationship between

economic growth and inflation. However, instead of this he got strong negative

relationship.12

After 1980s countries experienced new severe inflation processes, which were

empirically studied after the 1980s. In this period of time literature focused on the

10 See Tun Wai, U., (1959) for the detail. 11 See Pazos Felipe, (1972) for the detail. 12 See Wallich, Henry C., (1969) for the detail.

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short term output costs in hyperinflation process. There were very low or any output

costs for stabilization of high inflation, while cost of the stabilization of low

inflations was quite high. Thus presumption of the studies in the 1980s was a

positive relationship between inflation and economic growth in the short-run.

According to the new theorists, high level of prices might affect the economic

growth negatively. In 1993 Dornbusch and Fischer reported his findings that

inflation was negatively related to economic growth.13

Similarly in his next paper, Easterly analyzed the yearly pattern of the inflation

fluctuations and found that before and during the peak of the high inflation period

GDP per capita growth declined. Per capita growth recovered immediately after the

first year of peak of the inflation then started improving to high levels thereafter.

They analyzed persistence

and sources of moderate price level experience. In their study they provided 8 case

studies for different countries and according to their conclusion, by combining

incomes policy, deflationary fiscal policy and exchange rate actions and by

exploiting of positive supply shocks to make the inflation rate down countries could

decrease moderate inflation rates to low inflation rates.

A paper written by Mark N. Harris, Max Gillman and Lszl Mtys in 2001 is

based on a monetary model of growth for describing inflation processes. Their

model suggested a negative relationship between inflation and growth and especially

this inverse relationship is stronger at lower levels of inflation. This paper

empirically analyzed model for the OECD and APEC countries for the periods from

1961 to 1997. The statistically significant results of econometric model show that

when inflation rate declines growth increases marginally for OECD member

13 See Dornbusch, Rudiger and Fischer, Stanley, (1993).

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countries. For APEC member countries results were similar by using instrumental

variables.

In 1985 Kormendi and Meguire examined relationship between price levels and

economic growth by using cross-sectional data for forty seven countries from 1950

to 1977 and the results showed a significant negative relationship.

3.3 Nexus of Monetary Policy and Price Levels

The thought that money supply growth leads to increase in price levels is one of

the oldest idea in economics. In 1752 David Hume examined money and price levels

and found that increases in prices correlated with increases in money supply.

Concluding the evidence of Hume, Friedman said Inflation is always and

everywhere a monetary phenomenon14

If we take a close look to recent researches, many well known economists also

have found close relationship between changes in money supply and inflation. For

instance, Lucas in 1980 presented 2 implications of money supply theory: that

change of supply of money results the same change in the rate of price level and also

same change in nominal interest rates by using quarterly time-series data of U.S. for

the period from 1953 to 1977. Inspire of considerable evidences and a long history,

relationship between money supply and price levels remain disputed. Maybe this is

because of empirical relationship between price levels and money supply growth

holds for long time periods that empirical suggestions are not informative for

policymakers, who are concerning about the inflation of near future. Some of the

in 1963.

14 See Friedman, Milton (1992) for the detail.

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empirical studies were based on more than thirty years observation data. However,

Dwyer found short-term linkage between inflation and money supply growth rates15

Other IMF working paper prepared by Wojciech Malizsewski (2003) explains

the behavior of inflation in Georgian the post stabilization period, after introduction

of the national currency Lari in October 1995. A long-term equation linking prices

to money and exchange rates, as well as a short-run, dynamic equation for inflation

are estimated. This paper attempts to throw some light on the behavior of inflation

Georgia and to construct a tool for formulation and evaluation of the monetary

policy. It tests for the presence of economically interpretable long-run relationships

between money, inflation and exchange rates.

.

The results of the econometric model show that the long-run inflation equation

expresses prices as a function of money, exchange rate and real income. Short-run

dynamics of inflation are strongly affected by changes of money supply, exchange

rate and oil prices. As one of the FSU republics, the Georgian macroeconomic

situation is similar to Uzbekistans economy, as both countries were affected by

external shocks and their economies have been highly dollarized and parallel market

exchange rates have played a significant role at the beginning of independence and

following this paper is useful in Uzbekistans case.

Callen and Chang (1999) estimate two models of the inflation process in India:

one is based on a monetary approach and the other uses output gap and they then

assess their ability to forecast recent inflation developments. Second, they use a

series of vector autoregressions (VARs) for forecasting future inflation. The authors

argue that wholesale price index (WPI) has broader coverage and is published more

15 See Dwyer, G. and Hafer, R.W. (1999) for the detail.

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frequently than consumer price index (CPI) in India. So that they preferred to

analyze WPI even though CPI is more relevant in measuring inflation. So the

empirical work focuses on forecasting both the overall WPI and manufacturing price

index. The paper applied co-integration techniques to model the long-run behavior

of prices and then derives dynamic equation for inflation based on these results. The

paper found some important results determining inflation in India and that prices of

primary goods are largely derived from climatic conditions and by changes in

administered prices. Monetary aggregates also appear to contain the best information

about future inflation. Consecutively, the authors give some policy implications and

also raise number issues for the monetary authorities.

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Chapter 4: FRAMEWORK OF ANALYSIS AND EMPRICAL ESTIMATION

This paper studies the effect of monetary policies on price levels in Uzbekistan.

For this purpose, we employ three alternative econometric models: the linear

regression model, the vector autoregression (VAR) model, and vector error

correction (VECM) model. Based on the results of primary tests, the cointegration

test and the unit root test, we choose the appropriate method.

If there is a cointegration between variables and estimation of Linear

Regression Model is unbiased then we will use simple OLS. On the other hand, if

equations are not cointegrated then we will use either VAR or VECM for further

analysis. Choosing VAR or VECM depends on the Unit Root Test. If the variables

has unit root in the level then we will use VECM otherwise, if there is no unit root at

least in one variable then we will use VAR. Since we use time series data, we should

test the stationary of the each variable in the model. It is important to make sure that

the variables used for the study are stationary or non-stationary, because, when the

series become non-stationary then we can obtain spurious estimation results. These

results lead us to inappropriate conclusions even OLS regression shows significant

results. The null hypothesis of the stationary test is that the variables have unit root

problem which means non-stationary.

Next step is to check if the variables are cointegrated or not. In 1987, Engle and

Granger introduced the concept of cointegration. The cointegration test examines

whether series have a long term equilibrium or long-run relationship. Testing for

cointegration combines the problems of unit root tests and tests with parameters

unidentified under the null hypothesis. In a series of examples it is found that

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consumption and income are co-integrated, wages and prices are not, short and long

interest rates are, and nominal GNP is co-integrated with M2, but not M1, M3, or

aggregate liquid assets 16

. In our study we also test the long-run equilibrium

relationship between non-stationary variables by using Jahansen Cointegration Test.

If in the long-run, variables are cointegrated each other then OLS method is efficient

and unbiased otherwise we employ VAR model.

4.1- Model Specification and Data

The first alternative method is simple linear regression by employing

economic series such as output, money supply, exchange rate, interest rate, foreign

price and price level for further analysis of inflation of Uzbekistan.

Consider an economy producing tradable and non-tradable goods. Following

Obsfeld and Rogoff (1996), we assume that the overall price level pt is a weighted

average of the price of tradable goods pT and non-tradable goods pN. Thus, the

overall price level is represented by the standard log-linear form:

= + (1 ) , (1) where is the share of tradable goods in total domestic expenditure.

We assume that the price of tradable goods pT is governed by the absolute

purchasing power parity (PPP), the hypothesis that the long-run exchange rate et is

determined by domestic prices relative to foreign prices pft17

= + , (2)

. In logarithm form this

implies:

16 See Engle, R. F. and Granger, C.W.J, (1987). 17 See Dornbusch (1982) for the detail.

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It is assumed that the price of non-tradable goods depends on both supply and

demand factors. Demand for non-tradable is assumed to be related to overall demand

in the economy which for simplicity, can be represented by the money market

equilibrium18

= 1 2 , (3) .

where ms and md represent the supply and the demand for real money balances,

respectively.

The demand for real money balances is specified by the standard Cagan money

demand function19

= 0 1, (4) . Thus, we have

where yt is the real income and it is the nominal interest rate.

Substituting equations (2), (3), and (4) into (1) we get:

= + + (1 )(1 0 1) , (5) Equation (5) implies that the overall price level is function of output, money

supply, exchange rate, foreign price, and interest rate. Thus, we have

Pt=f(Yt, Mt, Et, Pft, It) , (6)

Now we are in the stage to propose the first our econometric model. In order to

examine the effect of monetary policies on inflation, we consider the following

simple linear regression model.

= 0 + 1 + 2 + 3 + 4 + 5 + , (7) where M is money supply, Y is output, ER is exchange rate of UZS to USD, Pf is

foreign price(USD CPI), IR is interest rate and P is price level.

18 See Moser, G.G. (1995) for the detail. 19 See Cagan (1956) for the detail.

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The second proposed method is Vector Autoregression (VAR) model. VAR

model provides a useful framework to analyze the effect of monetary policies, and a

number of studies have examined the relationship between money supply and,

inflation (see for example Kamin and Rogers, 2000).

We are interested in the relationship between inflation, price levels, and

macroeconomic variables. In particular, we are interested in how prices and

macroeconomic variables affect inflation rate, and also how inflation rate influences

them. In order to examine, we use the Granger-

The basic idea of the Granger-Causality Test is that past values of variables can

explain current values of variables and usually it is performed by assessing the

significance of parameters in the following regression:

Yt= + t + 1Yt-1 + + pYt-1 + 1Xt-p + + qXq-1 + et

Here X Granger causes Y if any or all of 1 , , q are statistically significant. In

other words, if X at any time in the past has explanatory power for the current value

of Y, then we can say X Granger causes Y.

Vector in VAR indicates the more than one variable will be predicted. Thus, a

set of regressions is run simultaneously and this indicates that variables will be

regressed on their own past values. Our model also includes macroeconomic

variables: inflation rate, output, money supply, exchange rate, foreign price and

interest rate. As mentioned previous parts, we are interested in whether these

variables have relationship with inflation by lag length and, in their turn, whether

money supply, output, exchange rate, interest rate and foreign price are influenced

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by lagged values of the variable inflation. In order to check this, we will apply the

Granger-Causality Test.

Following the Sims we can also take the first difference when variables are

non-stationary. On the other hand, in their study (1990) Sims, Stock and Watson

mentioned that the VAR with non-stationary variables incur some loss in estimators

efficiency although it may have in term of estimators consistency. Since the major

target is to examine the effectiveness of the monetary policy in monitoring the high

inflation by using non-stationary data, the estimators consistency could be more

important than estimators efficiency in our problem. Thus, we analyze the

relationship between five main macroeconomic variables: inflation rate, GDP,

money supply, exchange rate, interest rate and foreign price level to employ a VAR.

The main outcomes of the VAR estimation are vector autoregression estimates

and impulse-response functions. To analyze the interaction between variables, this

study mostly relies on the impulse-response function (IRF). The IRF trace the effects

of a shock to one endogenous variable on to the other variables in the VAR model.

The third alternative method is Vector Error Correction Model (VECM).

One way of addressing this non-stationary issue is the use of first-differenced

time series in estimating the equation. This issue was first proposed by Granger in

1981 and later by Engle and Granger in 1987. According to Engle and Granger,

researchers can develop the cointegration relationship between variables to address

the non-stationary problem of variables. Their argument is that, if two or more

variables are cointegrated, that is, if there is a long relationship between them, then

the short run dynamics of the variables can be described by an Error Correction

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Model 20

In this research we propose three alternative econometric methods to analyze

the relationship between inflation and other economic variables. Depending on the

results of unit root and cointegration tests, we will choose one of these methods. If

the variables are non-stationary and there is no cointegration between equations then

we can take first difference of the variables and run OLS or use Vector

Autoregression model for further analysis. On the other hand, if the variables are

non-stationary and there is cointegration between variables then we use Vector Error

Correction Model (VECM). In this research we also assume a similar approach.

Then, we explore the existence of the cointegration relationship between variables

based on standard cointegration techniques.

. This has become the standard empirical approach to address the non-

stationary issue of time series data since the seminar paper by Engle and Granger in

1987.

Data

This paper uses main macroeconomics variables of Uzbekistan for the

analysis of all three alternative methods: OLS, VAR and VECM methods. For these

methods I used price level (P), money supply (M), output (Y), exchange rate of UZS

to USD (ER), foreign price (Pf) which is USD CPI and interest rate (IR). All

variables are quarterly for the period from 1st quarter of 1995 to 4th quarter of 2009.

The data on most variables are taken from Central Bank of the Republic of

Uzbekistan. Other sources of the data are International Monetary Fund, Asian

Development Bank and State Statistics Committee of the Republic of Uzbekistan.

20 See Engle, R. F. and Granger, C.W.J, (1987) for the detail.

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The descriptive statistics of these variables are presented in Table 3.

Table 3: Descriptive Statistics

Inflation

Rate GDP Money Supply

Exchange Rate

Foreign Price

Interest Rate

Mean 1197.82 3201.56 2167.87 686.66 126.25 3.92 Median 1389.67 1682.95 899.53 767.80 124.55 2.36 Maximum 2230.27 15757.10 11150.66 1511.40 151.53 53.67 Minimum 148.45 34.20 23.92 26.10 105.28 0.17 Std. Dev. 643.47 3810.30 2804.41 536.46 14.13 7.62 Skewness -0.14 1.54 1.61 0.00 0.23 5.21 Kurtosis 1.65 4.71 4.61 1.34 1.82 32.73 Observations 60.00 60.00 60.00 60.00 60.00 60.00

Source: Authors estimations

4.2- Data Analysis

By employing Augmented Dickey-Fuller (ADF) Test, we examine whether the

data are stationary or not. Table 4 reports the results of the ADF tests for all the

variables.

Table 4: Unit Root Test results

Variables Augmented Dickey-Fuller test

Level 1st Difference 2nd Difference

Price Level -0.51 -2.69* -9.41***

Exchange Rate 0.47 -6.13*** -8.80***

Interest Rate -2.32 -10.62*** -10.45***

Foreign Price -1.71 -2.73 -6.97***

Money Supply Growth -2.11 -6.19*** -6.50***

Output -2.17 -10.01*** -8.46***

Note: (***), (**) and (*) means significant at the 1%, 5% and 10% confidence level respectively.

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According to the results of the stationary tests above, we can reject the null

hypothesis of all variables at the level. This implies that although for all variables we

cannot reject the hull of unit roots in the level, we can reject the null of unit roots in

the first difference except foreign price level. This implies that prices, output, money

supply, exchange rate, interest rate except foreign price are stationary in first

difference.

Johansen Cointegration Test

The results of the Johansen Cointegration Test are shown in the Table 5 below:

Table 5: Johansen Cointegration Test

Hypothesized Number of Cointegrated Equations

Eigenvalue Trace 0.05

Trace Statistic

Critical Value

**MacKinnon-Haug-Michelis p-

values None * 0.67 172.52 103.85 0.00 At most 1 * 0.56 111.76 76.97 0.00 At most 2 * 0.47 66.17 54.08 0.00 At most 3 0.24 31.08 35.19 0.13 At most 4 0.15 15.85 20.26 0.18 At most 5 0.11 6.61 9.16 0.15

Note: * denotes rejection of the hypothesis at the 0.05 level

According to the Table 4 above, trace test indicates 3 cointegrating equations at

the 0.05 level which means there are some cointegrated equations in the long-run

relationship. This can lead us to spurious results in the simple regression. Many

researchers would neglect valuable information regarding the long-run relationship

between the non-stationary variables. Due to the Unit root test and Cointegration test,

the OLS and VECM estimates spurious because of the non-stationary issues.

Therefore, we conduct the VAR model as an alternative way in this paper.

Appendix 2 presents the results from OLS estimation of VAR(2). Since there

are five variables and two lags in our VAR, there are five equations to estimate.

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Each equation regress a dependent variable on each lag of the variables in the VAR.

Carrying out the Pairwise Granger causality test we test whether endogenous

variables can be treated as exogenous. If we examine the significant coefficients,

some interesting patterns emerge from the test:

All variables output, interest rate, foreign price Granger cause but money supply

and exchange rate do not cause Inflation;

All variables money supply, exchange rate, and foreign price Granger cause

output;

All variables inflation rate, output, exchange rate, interest rate except foreign

price do not Granger cause money supply;

All variables output, money supply, foreign price and interest rate except

inflation rate do not Granger cause exchange rate;

All variables exchange rate and interest rate, money supply except inflation rate

and output do not Granger cause foreign price;

All variables money supply, exchange rate and inflation rate except output and

foreign price Granger cause interest rate;

The results demonstrate that past values of output, foreign price and interest

rate can explain current inflation. On the other hand, the inflation rate is Granger

cause for exchange rate.

Furthermore, for analyzing how our variables affect each other over different

time horizons, we can precede dynamic analysis of our model by applying Impulse

Response Analysis. The Impulse-Response Function (IRF) shows us how a one-time

positive shock to one of the endogenous variables affects not only that variable, but

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also transmitted to all the other endogenous variables in the VAR through the lag

structure of the model.

Figure 4: Impulse Response Function Results

Note: Red dotted lines indicate Confidence Intervals

Source: Authors estimations

-.04

-.02

.00

.02

.04

1 2 3 4 5 6 7 8 9 10

Response of LNPRL to LNGDP

-.04

-.02

.00

.02

.04

1 2 3 4 5 6 7 8 9 10

Response of LNPRL to LNM

-.04

-.02

.00

.02

.04

1 2 3 4 5 6 7 8 9 10

Response of LNPRL to LNER

-.04

-.02

.00

.02

.04

1 2 3 4 5 6 7 8 9 10

Response of LNPRL to LNPF

-.04

-.02

.00

.02

.04

1 2 3 4 5 6 7 8 9 10

Response of LNPRL to LNIR

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As a result of the Granger-Causality Test we see that, some variables in our

model Granger affect the inflation rate some of them not. Hence, let us take a look to

the response of inflation rate to the other macroeconomic variables from the Figure 4

above. From the graph we can say that if we increase GDP growth for one time

period, at time period 0, then in the first two quarters growth rate of the inflation

grows more quickly than otherwise. However, the response of growth of inflation

rate to money supply growth shows unclear effect which means when we increase

the money supply one time, there is almost no effect to the growth of the inflation.

For the response of growth of inflation rate to growth of exchange rate and foreign

price we can say that if there is one time positive shock in foreign price level or

exchange rate then inflation level increases slightly over time. On the other hand,

when there is one time shock in the interest rate consequently inflation rate goes

down and keeps its level in the long-run as well.

We got similar findings when we analyzed the accumulated responses of the

price level to other variables. Accumulated Impulse-response function results

demonstrate the effect of increase in one variable to another in general instead of

one time shock.

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Figure 5: Accumulated Impulse Response Function Results.

Note: Red dotted lines indicate Confidence Intervals

Source: Authors estimations

-.3

-.2

-.1

.0

.1

.2

.3

1 2 3 4 5 6 7 8 9 10

Accumulated Response of LNPRL to LNGDP

-.3

-.2

-.1

.0

.1

.2

.3

1 2 3 4 5 6 7 8 9 10

Accumulated Response of LNPRL to LNM

-.3

-.2

-.1

.0

.1

.2

.3

1 2 3 4 5 6 7 8 9 10

Accumulated Response of LNPRL to LNER

-.3

-.2

-.1

.0

.1

.2

.3

1 2 3 4 5 6 7 8 9 10

Accumulated Response of LNPRL to LNPF

-.3

-.2

-.1

.0

.1

.2

.3

1 2 3 4 5 6 7 8 9 10

Accumulated Response of LNPRL to LNIR

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According to the Figure 5 above, we can see almost similar trend over time

with Figure 1. In accumulated Impulse response functions the response of price

level to the output, exchange rate and foreign price levels have same directions

which means when output, exchange rate and foreign price levels increase, then the

growth rate of inflation starts to increase slightly over time. This implies that

increase in price levels are linked with an increase in GDP growth, exchange rate

growth and increase in foreign prices. However, it is difficult to reach a conclusion

regarding the response of inflation growth to money supply growth. Because from

the graph we can see that, if money supply growth rises then this shock doesnt

affect the inflation growth at all.

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Chapter 5: EMPRICAL RESULTS AND POLICY IMPLICATIONS

Based on above findings, it seems that the central bank in Uzbekistan cannot

control price levels successfully by controlling money supply. Since the main

objective of the central bank of Uzbekistan is to maintain the stability of price level,

the central bank can implement other instruments of monetary policy, such as

interest rate policy or exchange rate policy as important devices to control and

monitor the inflation rate. According to my findings, it is obvious that the reduction

in the exchange rate by CBU can reduce the high inflation rate.

There are some other policies which can also reduce the exchange rate level.

The most efficient policy in many countries is to increase the openness of the

country, which means the country should increase its competitive export goods

which lead to decrease in exchange rate.

The second effective policy instrument in controlling the money supply and

reducing the inflation is the adjustment of the interest rates. In these circumstances,

decrease in money supply and price level can sustain the economic growth of the

republic of Uzbekistan.

Third, foreign price level and interest rate movements have both short-term and

long-term effects on the rate of price level. The effect of an increase in the foreign

price level could be off-set to some extend by controlling the exchange rate. This

strategy has become a more effective way of maintaining price stability in small

open economy such as Singapore21

21 See Peng, T.K. and Shanmugaratnam, T. (1992) for the detail.

.

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Chapter 6: CONCLUDING REMARKS

Stabilizing price levels is one of most important issues in Uzbekistan. This

paper studies how monetary policies affect price levels in Uzbekistan. For this

purpose, we use three alternative time series frameworks. To do this, we tested unit

root and cointegration test then depending on the results, we analyzed monetary and

non-monetary factors of inflation for last years. We estimated VAR model,

implemented the Granger Causality test and applied Impulse Response Analyses.

The present paper finds some interesting patterns after carrying out the pair

wise Granger Causality test to test whether endogenous variables can be treated as

exogenous. Our VAR model results demonstrate that lagged values of GDP growth,

exchange rate, interest rate and foreign price can cause current price level.

Moreover, Granger Causality test shows that lagged values output, interest rate

and foreign price can cause current price level. Alternatively, inflation rate can

affect the exchange rate.

Secondly, in order to examine the dynamic relationship between inflation rate,

price levels, and outputs, we estimate VAR model and compute IRFs.

According to the graphs of Impulse-Response Function we can say that if

growth of the output, exchange rate and foreign price level increase in one period,

then price level grows gradually over the period. However, the response of inflation

growth to money supply growth demonstrates very small negative correlation and

5 % confidence interval shows neutral area. Moreover, if we increase interest rate in

time this can lead to decrease in price level.

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Thirdly, we can see the similar results from analyzes of the accumulated

responses of inflation rate to other variables. All variables except money supply and

interest rate have similar trend over time which means when output growth,

exchange rate and foreign price levels increase, then the growth rates of price levels

start increasing gradually over time. However, we cannot say there is a relationship

between inflation growth and money supply growth by looking to the accumulated

impulse response function graphs.

We conclude that, the current inflation rate is explained not only by money

supply but also by other monetary factors, such as the exchange rate, interest rate,

foreign price levels or output growth. This study demonstrates that for the realization

of an effective anti-inflationary policy, other monetary factors also need to be

watched. Their elimination will help curb the inflation rate and reduce minimum

losses in the economy. To completely manage price levels through controlling only

money supply is impossible. Instead, it is necessary to have administrative,

structural and institutional measures directed at overcoming the disproportions

which have arisen in the economy. We conclude that giving more consideration to

both past and forecasted macroeconomic variables in the setting operation procedure

would improve policy efficiency.

Furthermore, in October 2003, after more than decade of keeping its current

account unconvertible, the Government of the Republic of Uzbekistan announced

current account convertibility. This move signaled the end of era in which the

country practiced a parallel market exchange rate and it is a welcome step in the

development of an efficient monetary policy.

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As a result of tight monetary policy Uzbek economy experienced the lowest

level of inflation 3.7 percent annually in 2004 and amounted 7.1 percent for 2009.

Past recent years prices strongly affected by non-monetary factors such as dramatic

seasonal fluctuations, cost of monopoly, cost-push inflation and wage increases.

Of course, this research cannot be regarded as the final word on this issue

because of the limitations of the approach.

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APPENDICES Appendix 1: OLS Method Estimation Results

Dependent Variable: Inflation Growth Method: Least Squares Sample: 1995Q1 2009Q4 Included observations: 60

Variable Coefficient Std.

Error t-Statistic Prob. C 22.37 2.74 8.17 0.0000 Output Growth -0.22 0.05 -4.12 0.0001 Money Supply Growth 0.63 0.08 7.72 0.0000 Exchange Rate 0.39 0.03 13.77 0.0000 Foreign Price -4.23 0.62 -6.77 0.0000 Interest Rate -0.01 0.01 -1.32 0.1917 R-squared 0.99 Mean dependent var 6.87 Adjusted R-squared 0.99 S.D. dependent var 0.75 S.E. of regression 0.08 Akaike info criterion -2.17 Sum squared resid 0.33 Schwarz criterion -1.96 Log likelihood 71.06 Hannan-Quinn criter. -2.09 F-statistic 1066.04 Durbin-Watson stat 1.11 Prob(F-statistic) 0.0000

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Appendix 2: Vector Autoregression Estimation Results

Sample (adjusted): 1995Q3 2009Q4 Included observations: 58 after adjustments Standard errors in ( ) & t-statistics in [ ]

Inflation Growth

Output Growth

Money Supply Growth

Growth of Exchange

Rate

Foreign Price

Interest Rate

Growth

Inflation

Growth (-1)

0.697078 -0.05407 0.209252 -0.03634 -0.0065 1.691285

-0.13998 -0.62404 -0.27011 -0.42784 -0.05631 -3.50216

[ 4.97991] [-0.08664] [ 0.77468] [-0.08494] [-0.11542] [ 0.48293]

Inflation

Growth (-2)

0.084055 0.507556 -0.13799 0.630647 -0.05325 -3.20795

-0.12565 -0.56015 -0.24246 -0.38403 -0.05054 -3.14358

[ 0.66898] [ 0.90611] [-0.56913] [ 1.64216] [-1.05358] [-1.02048]

Output

Growth (-1)

0.16964 0.037159 0.052825 0.012227 -0.00886 -3.76155

-0.0308 -0.13731 -0.05943 -0.09414 -0.01239 -0.77059

[ 5.50783] [ 0.27062] [ 0.88881] [ 0.12989] [-0.71537] [-4.88138]

Output

Growth (-2)

-0.03413 -0.83624 -0.10373 -0.00532 0.030432 0.266476

-0.03069 -0.1368 -0.05921 -0.09379 -0.01234 -0.76775

[-1.11221] [-6.11274] [-1.75168] [-0.05672] [ 2.46533] [ 0.34709]

Money Supply

Growth (-1)

-0.06931 0.757913 0.589047 -0.05128 0.026576 5.067075

-0.08541 -0.38076 -0.16481 -0.26105 -0.03436 -2.13687

[-0.81153] [ 1.99052] [ 3.57406] [-0.19644] [ 0.77351] [ 2.37126]

Money Supply

Growth (-2)

0.029522 0.245704 0.232433 -0.25433 -0.00428 -1.18301

-0.08004 -0.35682 -0.15445 -0.24464 -0.0322 -2.00253

[ 0.36884] [ 0.68858] [ 1.50490] [-1.03963] [-0.13304] [-0.59076]

Growth of Exchange Rate (-1)

0.088478 0.151494 -0.01967 0.926156 0.016201 -0.78

-0.04956 -0.22095 -0.09564 -0.15148 -0.01994 -1.23997

[ 1.78525] [ 0.68566] [-0.20571] [ 6.11400] [ 0.81264] [-0.62905]

Growth of Exchange Rate (-2)

-0.07446 0.210248 0.020542 -0.13951 -0.00208 2.523594

-0.05046 -0.22498 -0.09738 -0.15424 -0.0203 -1.26259

[-1.47551] [ 0.93453] [ 0.21094] [-0.90445] [-0.10266] [ 1.99874]

Foreign Price (-1) 1.037631 5.664705 2.404136 2.14193 0.315917 -20.7399

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-0.44464 -1.98227 -0.85802 -1.35904 -0.17886 -11.1246

[ 2.33364] [ 2.85769] [ 2.80197] [ 1.57606] [ 1.76624] [-1.86432]

Foreign Price (-2) -1.43385 -2.54382 0.169794 0.446151 0.280437 2.479659

-0.49884 -2.22387 -0.96259 -1.52468 -0.20066 -12.4805

[-2.87439] [-1.14387] [ 0.17639] [ 0.29262] [ 1.39754] [ 0.19868]

Interest Rate Growth (-1)

-0.01266 0.016083 -0.00788 -0.02969 -0.00031 0.473986

-0.00638 -0.02842 -0.0123 -0.01949 -0.00256 -0.15951

[-1.98496] [ 0.56585] [-0.64073] [-1.52366] [-0.11905] [ 2.97160]

Interest Rate Growth (-2)

-0.00796 0.020464 0.012199 0.010726 -0.00105 0.092622

-0.00621 -0.02767 -0.01198 -0.01897 -0.0025 -0.15527

[-1.28257] [ 0.73964] [ 1.01866] [ 0.56546] [-0.42141] [ 0.59653]

C 2.679329 -14.1248 -11.264 -13.2629 1.982641 87.52793

-2.14138 -9.54656 -4.13219 -6.5451 -0.86141 -53.576

[ 1.25121] [-1.47957] [-2.72591] [-2.02639] [ 2.30163] [ 1.63371]

R-squared 1.00 0.99 1.00 1.00 0.99 0.62 Adj. R-squared 1.00 0.99 1.00 1.00 0.99 0.51 Sum sq. resids 0.04 0.78 0.15 0.37 0.01 24.57 S.E. equation 0.03 0.13 0.06 0.09 0.01 0.74 F-statistic 2503.26 590.24 3331.68 977.54 392.06 6.01 Log likelihood 129.35 42.66 91.23 64.55 182.17 -57.39 Akaike AIC -4.01 -1.02 -2.70 -1.78 -5.83 2.43 Schwarz SC -3.55 -0.56 -2.24 -1.32 -5.37 2.89 Mean dependent 6.93 7.28 6.81 6.00 4.84 0.52 S.D. dependent 0.68 1.47 1.51 1.30 0.11 1.06

Determinant resid covariance (dof adj.)

8.17 Determinant resid covariance

1.78

Log likelihood

491.06 Akaike information criterion

-14.24

Schwarz criterion

-11.47

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