Law of Demand and Supply
The theory of demand and supply includes the law of demand and the law of supply. These laws explain the behaviour of demand and supply in response to changing prices.…
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June 27, 2022
Interpreting ACF and PACF plots
Autocorrelation Function (ACF) and Partial Autocorrelation Function (PACF) can provide valuable insights into the behaviour of time series data. They are often used to decide the number of Autoregressive (AR)…
June 21, 2022
Seasonality and Seasonal-ARIMA models
Seasonality, sometimes referred to as seasonal variation, is common in economic time series. The time series variables may change in a cyclical pattern with time. This cyclical pattern is termed…
May 27, 2022
ARIMA Model Estimation and Model Selection
Autoregressive Integrated Moving Average (ARIMA) models are often used for forecasting purposes. These models for time series data have been observed to provide accurate forecasts. Additionally, these models allow dynamic…
May 25, 2022
Test of Overidentifying Restrictions: Sargan Test
The Sargan Test of Overidentifying Restrictions is applied to check the validity of the instruments used in simultaneous equation models. As the name suggests, it is applicable to overidentified model…
May 19, 2022
Two-Stage Least Squares (2SLS) Estimation
The Two-Stage Least Squares or 2SLS is used to estimate simultaneous equation models or system of equations. Moreover, 2SLS uses a single equation approach. That is, each equation in the…
May 18, 2022
Test of Endogeneity: Durbin-Wu-Hausman Test
The Durbin-Wu-Hausman Test of Endogeneity is used to determine whether the endogenous regressors in a simultaneous equation model are truly endogenous. Simultaneous equation models include both endogenous and exogenous variables.…
May 17, 2022
VAR-VECM Goodness of fit
The VAR-VECM Goodness of fit can be analyzed using similar methods. After estimating Vector Autoregressive (VAR) or Vector Error Correction Mechanism (VECM), it is essential to assess how well the…
May 10, 2022
VECM Estimation and Interpretation
The Vector Error Correction Mechanism (VECM) is estimated in the presence of cointegration among the system of variables. It allows us to estimate short-run as well as long-run coefficients. Using…
May 9, 2022
Vector Error Correction (VECM) and VAR: Theory
Vector Error Correction Mechanism (VECM) models are a special application of VAR or Vector Autoregressive Models. The specification of VECM models involves the introduction of error correction terms into the…
May 4, 2022
Choice under Uncertainty and Risk
Cardinal and ordinal utility analysis assume that all the variables, such as prices and income, are known with certainty. However, this is not the case in reality. Consumers have to…
April 25, 2022
Income and Substitution Effects: Hicks and Slutsky Methods
The price effect is the combination of both the income and substitution effects. The substitution effect is always positive, however, the income effect can be positive or negative. Therefore, the…
April 22, 2022
Impulse Response Functions after VAR and VECM
Impulse Response Functions or IRFs are used to study the effects of shocks or impulses in a VAR or VECM system. It traces out one unit or one standard deviation…
April 13, 2022
Information Criteria (AIC/SIC) and Model Selection
Information Criteria are used to compare and choose among different models with the same dependent variable. Akaike Information Criterion (AIC) and Schwarz or Bayesian Information Criterion (SIC or BIC) are…
March 30, 2022
Wu-Hausman Test: Choosing between Fixed and Random Effects
The Wu-Hausman Test can be used to determine whether the Fixed Effects Model or Random Effects Model is more appropriate. To apply this test, we need to estimate both the…
March 25, 2022
