STATA

ASSIGNMENT
GROUP 3

Jitesh Rastogi
ROLL NUMBER: 86
INTRODUCTION
In this report, an attempt has been made to explore the influential relationship between Child Anemia on the
explanatory variables child_anemia, prenatal_preg, lit_female, lit_male, anemia_preg, undernourish,
skilledstaff, ari. We have the data for Anemia in Children for 114 countries (average across the years 1965 to
2017). The findings of the study reveal that the variations in Prenatal_preg, lit_female, Anemia_preg,
undernourish, ari can jointly explain the significant changes in Child Anemia.
Inflation is a sustained increase in general price level of goods and services in an economy over a period.
India uses changes in the Consumer Price Index (CPI) to measure its rate of inflation.

2. THEORETICAL BACKGROUND
Priori, one expects that the following relationships will hold:
a.) There has been a positive correlation between movements in the Oil Price Index and inflation as higher
crude oil is a major input in the economy- it is used in the critical activities such as fuelling transportation and
heating homes-and if input cost rises, so should the cost of end products.
b.) Interest rate and Inflation rate has negative relation, as in general, if interest rates lowered, more people
are able to borrow more money. The result is that consumers have more money to spend, causing the economy
to grow and inflation to increase. The opposite holds true for rising interest rates.
c.) The growth of IIP used as a proxy for growth of industrial sector and positively related with the Inflation.
e.) Gross fiscal deficit is the difference between the government's expenditures and its revenues (excluding
the money it had borrowed). This has a positive correlation with Inflation rate since increase in expenditure
by government lead to increase in demand for goods and services thus an increase in prices.
f.) Rainfall and inflation are negatively correlated since India’s three-fifths of land under cultivation are
irrigated with only rainfall thus a bad rainfall leads to higher food inflation.

3. MODEL SPECIFICATION
MODEL 1: Yt = β1 + β2 X2t + β3 X3t + β4 X4t + β5 X5t + β6 X6t + β7 X7t + ut
Inflation rate = β1 + β2 (Interest) t + β3 (Oil) t + β4 (Money) t + β6 (IIPgth) t β5 (Fiscal) t + β7 (Rainfall)
t + ut

Where,
child_anemia Prevalence of anemia among children (% of children under
prenatal_preg Pregnant women receiving prenatal care (%)
lit_female Literacy rate, adult female (% of females ages 15 and above
lit_male Literacy rate, adult male (% of males ages 15 and above)
anemia_preg Prevalence of anemia among pregnant women (%)
undernourish Prevalence of undernourishment (% of population)
skilledstaff Births attended by skilled health staff (% of total)
ari ARI (Acute Respiratory Infections) treatment
(% of children under 5 taken to a health provider)
Inflation rate Inflation (% p.a.)
Interest Interest Rate (% p.a.)
Oil Oil Price Index
Money Money Supply - Broad Money M3 (Rupees Billion)

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 FiscaL Gross fiscal deficit (Rs Billion)
IIPgth Growth of (index of) industrial production) (% p.a.)
Rainfall Rainfall (in millimeters)

The theory dictates, a priori, that rainfall has positive relation with Food inflation but according to the given
data, rainfall is statistically insignificant and the regression of inflation on rainfall shows that the independent
variable is insignificant and the adjusted R2 is negative thus the data on rainfall does not explain any variation
in the inflation rate(OUTPUT 3). Therefore, the above model is changed to the following:
Inflation rate = β11 + β21 (Interest) t + β31 (Oil) t + β41 (Money) t + β51 (Fiscal) t + β61 (IIPgth) t + ut1
MULTICOLLINEARITY
Now regressing the above model gives Output: which shows insignificant coefficient of fiscal variable. In
addition, the correlation matrix (OUTPUT 2) points to the positive correlation between money and fiscal.
Therefore, by regressing money on fiscal provides (OUTPUT 3) which shows a significant relation between
fiscal and money variables i.e. the slope coefficient is statistically significant and the R 2 shows a 25 per cent
of explanation of variation in money by fiscal. Also in theory, we see a positive relation between fiscal deficit
and money supply. Hence fiscal variable may be the cause of multi-collinearity i.e. few significant t statistics
and a high R2. Hence, it suggest dropping of fiscal variable from the set of independent variables for the
determinant in inflation rate.
Now again regressing inflation on the remaining independent variables,
MODEL 2: Inflation rate = β12 + β22 (Interest) t + β32 (Oil) t + β42 (Money) t + β62 (IIPgth) t + ut2
The regression table shows that the above model explains about 57 per cent of variation in Inflation rate and
the partial slope coefficients are statistically significant at 5 per cent, level of significance except the partial
slope coefficient of IIPgth, which is statistically significant at 10 per cent, level of significance.
AUTOCORRELATION (OUTPUT 5)
One period lag of inflation variable is generated and inflation is regressed over lagged inflation, interest, oil,
money and IIPgth. From this regression, residuals are predicted and these are regressed over one period-
lagged residuals. Now a scatterplot is generated with residuals on Y-axis and one period-lagged residuals on
X-axis with two lines at Y=0 and X=0. From this, we notice that there is no significant autocorrelation. Also
with the Durbin-Watson statistics, value is 1.67 i.e. close to 2 (no autocorrelation). In addition, Breusch-
Godfrey test does not reject the null hypothesis of no serial autocorrelation at 1% level of significance but
rejects it at 5 % level of significance.
HETROSCEDASTICITY (OUTPUT 6)
Using Breusch-Pagan / Cook-Weisberg test for heteroscedasticity, we are not able reject the Null hypothesis
of Homoscedasticity since p-value of the estimated chi-square is almost zero. For rectifying this, we use
Robust command. Output: Now the partial slope coefficients are significant at 5 per cent level of
significance but partial slope coefficient of IIPgth is significant at 10 per cent level of significance.

* Superscript on Partial slope coefficients show the new estimated coefficients of the remaining variables.
INTERPRETATION OF THE ESTIMATED SLOPE COEFFICIENTS AND INTERCEPT

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β12 measures the average value of Inflation rate when all independent variables are simultaneously zero.
β22 measures, on an average, 1% increase in interest rate leads to .6288966% decrease in Inflation rate, ceteris
paribus.
β32 measures, on an average, 1 unit increase in the Oil price index leads to .0277832% increase in inflation
rate, ceteris paribus.
β42 measures, on an average, 1 billion rupees increase in Money Supply leads to .0000346% increase in
inflation rate.
β52 measures, on an average, 1% increase in growth of IIP leads to -.0525387% decrease in inflation rate.
STANDARDISED REGRESSION (OUTPUT 7)
Holding all other variables constant, a standard deviation increase in interest rates, on average, leads to a
.3552936 standard deviation decrease in Inflation rate. Similarly, a standard deviation increase in Oil price
index, on average, leads to a 5336888 increase in Inflation rate holding other variables constant. A standard
deviation increase in Money supply, on average, causes 0.30567 standard deviation increase in Inflation rate
holding other variables constant. A standard deviation increase in growth rate of IIP, on average, causes a
0.1091 standard deviation decrease in Inflation rate holding other variables constant. Relatively speaking,
interest rate, oil price index and Money supply have more impact on Inflation rate than IIPgth.
CONCLUDING REMARKS
It is true that the Inflation Rate and select macro-economic variables such as interest rates, oil price index,
Money supply and growth of Index of Industrial Production (IIP) exhibit an influential relationship. Often,
economically significant macro-economic variables can turn out to be statistically insignificant. Here growth
rate of IIP has a negative relation, whereas economically it has a positive relation with the inflation rate but
since it is not highly significant from the data that growth rate of IIP has a negative relation we cannot be sure
of rejecting the economic claim. Hence, standard regression results must be interpreted with great caution and
must be accompanied by further investigation of scatter diagrams, plots, measures of central tendency etc.
Other macro-economic variables can be included in the model to improve it further.

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MODEL 1:

Source SS df MS Number of obs = 180 OUTPUT 2:

F( 6, 173) = 38.31
Model 999.676686 6 166.612781 Prob > F = 0.0000
Residual 752.402353 173 4.34914655 R-squared = 0.5706
Adj R-squared = 0.5557
Total 1752.07904 179 9.78815106 Root MSE = 2.0855

inflation Coef. Std. Err. t P>|t| [95% Conf. Interval]

interest -.6269924 .0993498 -6.31 0.000 -.8230862 -.4308985

oil .0278743 .0056102 4.97 0.000 .0168012 .0389475
money .0000337 .0000131 2.57 0.011 7.78e-06 .0000595
iipgth -.0517809 .0305937 -1.69 0.092 -.112166 .0086041
fiscal .0001663 .0006452 0.26 0.797 -.0011072 .0014398
rainfall -.0003792 .0016951 -0.22 0.823 -.0037249 .0029665
_cons 6.588409 .7222631 9.12 0.000 5.162827 8.013991

CORRELATION BETWEEN VARIABLES

. pwcorr inflation interest oil iipgth fiscal rainfall money

inflat~n interest oil iipgth fiscal rainfall money

inflation 1.0000
interest 0.0110 1.0000
oil 0.6541 0.4168 1.0000
iipgth -0.2163 -0.2243 -0.1131 1.0000
fiscal 0.3631 0.1461 0.4115 -0.2845 1.0000
rainfall 0.0309 0.0285 0.0943 0.0345 -0.0339 1.0000
money 0.6592 0.3905 0.8379 -0.4138 0.5000 0.0202 1.0000

OUTPUT 3: REGRESSION INFLATION RAINFALL

. regress inflation rainfall

Source SS df MS Number of obs = 180

F( 1, 178) = 0.17
Model 1.67148115 1 1.67148115 Prob > F = 0.6806
Residual 1750.40756 178 9.83375033 R-squared = 0.0010
Adj R-squared = -0.0047
Total 1752.07904 179 9.78815106 Root MSE = 3.1359

inflation Coef. Std. Err. t P>|t| [95% Conf. Interval]

rainfall .0010383 .0025184 0.41 0.681 -.0039315 .006008

_cons 6.757788 .3309572 20.42 0.000 6.104684 7.410893

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OUTPUT 4:REGRESSION OF MONEY AND FISCAL

. regress money fiscal

Source SS df MS Number of obs = 180

F( 1, 178) = 59.33
Model 3.4130e+10 1 3.4130e+10 Prob > F = 0.0000
Residual 1.0240e+11 178 575262338 R-squared = 0.2500
Adj R-squared = 0.2458
Total 1.3653e+11 179 762718394 Root MSE = 23985

money Coef. Std. Err. t P>|t| [95% Conf. Interval]

fiscal 49.00293 6.36191 7.70 0.000 36.44846 61.5574

_cons 31277.24 2342.676 13.35 0.000 26654.24 35900.23

MODEL 2 (FINAL MODEL)

. regress inflation interest oil money iipgth

Source SS df MS Number of obs = 180

F( 4, 175) = 58.06
Model 999.142418 4 249.785605 Prob > F = 0.0000
Residual 752.936621 175 4.30249498 R-squared = 0.5703
Adj R-squared = 0.5604
Total 1752.07904 179 9.78815106 Root MSE = 2.0742

inflation Coef. Std. Err. t P>|t| [95% Conf. Interval]

interest -.6288966 .098489 -6.39 0.000 -.8232758 -.4345174

oil .0277832 .0055201 5.03 0.000 .0168886 .0386778
money .0000346 .0000127 2.72 0.007 9.50e-06 .0000598
iipgth -.0525387 .0302103 -1.74 0.084 -.1121622 .0070847
_cons 6.580705 .7006119 9.39 0.000 5.197969 7.963441

OUTPUT 5: AUTOCORRELATION

. reg inflation lag_inf interest oil money iipgth

Source SS df MS Number of obs = 179

F( 5, 173) = 484.16
Model 1618.39131 5 323.678261 Prob > F = 0.0000
Residual 115.657516 173 .668540554 R-squared = 0.9333
Adj R-squared = 0.9314
Total 1734.04882 178 9.74184731 Root MSE = .81764

inflation Coef. Std. Err. t P>|t| [95% Conf. Interval]

lag_inf .9127059 .029564 30.87 0.000 .8543532 .9710585

interest -.0946232 .042911 -2.21 0.029 -.1793197 -.0099267
oil .0069086 .0022816 3.03 0.003 .0024053 .011412
money -7.81e-06 5.21e-06 -1.50 0.135 -.0000181 2.46e-06
iipgth -.0203111 .0119555 -1.70 0.091 -.0439085 .0032864
_cons .8831711 .3324783 2.66 0.009 .226935 1.539407

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OUTPUT 6: HETROSCEDASTICITY

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of inflation

chi2(1) = 13.77
Prob > chi2 = 0.0002

. regress inflation interest oil money iipgth, robust

Linear regression Number of obs = 180

F( 4, 175) = 78.18
Prob > F = 0.0000
R-squared = 0.5703
Root MSE = 2.0742

Robust
inflation Coef. Std. Err. t P>|t| [95% Conf. Interval]

interest -.6288966 .120043 -5.24 0.000 -.865815 -.3919781

oil .0277832 .0056205 4.94 0.000 .0166905 .0388759
money .0000346 .0000158 2.19 0.030 3.46e-06 .0000658
iipgth -.0525387 .0303252 -1.73 0.085 -.1123889 .0073114
_cons 6.580705 .7143839 9.21 0.000 5.170788 7.990622

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OUTPUT 7: STANDARDIZED REGRESSION

. regress SD_inf SD_interest SD_oil SD_money SD_iipgth

Source SS df MS Number of obs = 180

F( 4, 175) = 58.06
Model 102.076732 4 25.519183 Prob > F = 0.0000
Residual 76.9232786 175 .439561592 R-squared = 0.5703
Adj R-squared = 0.5604
Total 179.000011 179 1.00000006 Root MSE = .66299

SD_inf Coef. Std. Err. t P>|t| [95% Conf. Interval]

SD_interest -.3552936 .0556411 -6.39 0.000 -.4651076 -.2454795

SD_oil .5336888 .1060365 5.03 0.000 .3244138 .7429638
SD_money .3056666 .1123685 2.72 0.007 .0838947 .5274385
SD_iipgth -.1091013 .0627344 -1.74 0.084 -.2329146 .014712
_cons 4.12e-07 .0494167 0.00 1.000 -.097529 .0975298