Tarun Singh

Worked with:
Alex Sloan
Alexander Marcus
Econometrics 1123: Problem Set 3

1. 20
15 A)
ftmpop
10 5
0

0 20 40 60
gdppc
B)
4
2 0
lnftmpop
-2 -4
-6

-2 0 2 4
lngdppc
 C)

4
2 0
lnftmpop
-2 -4
-6

0 2 4 6 8
lackpf

D) We want to use the log-log specification of lnftmpop vs. lngdppc because

we are interested in the percent change terrorism vs. the percent change of
gdppc and not just unit changes. Furthermore, it seems like there is a linear
relationship in graph b but no apparent linear relationship in graph a.

E) The relationship between lnftmpop and lackpf appears to non-linear. A

downward quadratic function may describe the data the best. The data
appears to show that terrorism is lower in those nations with low political
freedoms and those with high political freedoms whereas it is highest for
those nations with a medium number of political freedoms.

2. Economics 1123, Problem Set 3, Table 2

Determinants of Terrorism

(1) (2) (3) (4) (5)

Dependent variable: lnftmpop lnftmpop lnftmpop lnftmpop lnftmpop
Regressor:
lngdppc -.3124901 -.2791311 .0569704 .0473908 -.064753
(.2151112 (2453983 3
(.1504035) (.203559
) )
4) (.282961
1)
 (lngdppc)2 __ __ -.033721 __ __
4

(.081199
7)
lackpf __ .035685 1.651034 1.466333 1.690798
1 (.596872
(.539245 (.546448
9)
(.142987 3) 6)
8)
lackpf2 __ __ -.194043 -.170390 -.198721
4 2 5
(.066597
(.061710 (.061781
1)
7) 1)
ethnic __ __ __ .655626 .8777034
(.958243
(.972179
3)
2)
religion __ __ __ -1.24292 -1.57253
1 8
(1.22536
(.970418
5)
1)
Mideast __ __ __ __ -1.11885
4

(1.27298
3)
Other regional No No No No Yes
dummies (latinam,
easteurope, africa,
eastasia)?
Intercept -2.047654 -2.20082 -4.81342 -4.43084 -3.5785
(.623109 2
(-2.132806) (1.07668 (1.59639
5)
8) (1.29211) 1)
F-statistics testing the hypothesis that the population coefficients on the
indicated regressors are all zero:
lngdppc, lngdppc2 __ __ 0.11 __ __

(0.8995)
lackpf, lackpf2 __ __ 4.95 3.81 4.47

(0.0098) (0.0271) (0.0153)

ethnic, religion __ __ __ 1.01 1.25

(0.3705) (0.2941)
Other regional __ __ __ __ 0.81
dummies
(0.5244)
 Regression summary statistics
2 0.0492 0.0370 0.1228 0.1188 0.0871
R
R2 0.0619 0.0627 0.1696 0.1792 0.2121
SER 1.8431 1.8549 1.7703 1.7673 1.7989
n 76 76 76 74 74

Notes: Heteroskedasticity-robust standard errors are given in parentheses under

estimated coefficients, and p-values are given in parentheses under F- statistics.
The F-statistics are heteroskedasticity-robust. Coefficients are significant at the
+
10%, *5%, **1% significance level. The “other regional dummies” included in
regression (5) are latinam, easteurope, africa, and eastasia (the omitted case is
Western Europe combined with North America).

3. A) When we use a t-test we get a t-statistic of -2.08 which has a p-value of .041,
so we reject the null hypothesis at the 5% confidence level that the coefficient on
lngdppc is 0. This means that for a 1% change in gdp per capita we expect a
-.3124901% change in fatalities per million in a population from terrorist attacks.

B) We fail to reject the null hypothesis that at least one of lngdppc and lngdppc2 are
0 because we get a F-statistic of 0.11 and a p-value of 0.8995 which is greater than
.05 so we fail to reject at the 5% level.

C) We reached different conclusions in A and B most likely due to an omitted

variable bias in A. The result in A shows that lngdppc has a statistically significant
effect on the rate of terrorism related deaths, whereas B shows that when we look
at lngdppc and lngdppc2 together we see that they do not have a statistically
significant effect on the rate of terrorism related deaths. This may be due to omitted
variable bias. In regression 3, we included lackpf, but in regression 1 we didn’t. In
regression 3 we see that the t-statistic for lackpf is significant meaning political
freedoms have a large effect on terrorism. In regression 1 we saw that lngdppc was
significant but it wasn’t significant in regression 2 this may be due to lngdppc
capturing the effect of lackpf. We can test this possibility by looking at the
correlation of lackpf and lngdppc which is -0.6859. A one unit increase in lackpf
causes a 1.651% increase in lnftmpop and as lackpf increases, lngdppc decreases.
This explains why the coefficient of lngdppc in regression 1 is negative and
statistically significant because as lngdppc increases, lackpf decreases in turn
causing lnftmpop to decrease.

D) No, since the t-statistic for lngdppc2 in regression 3 is not-statistically significant,

we can’t reject the null hypothesis that the coefficient on lngdppc2 is 0, so we have
no evidence that the relationship between lnftmpop and lngdppc is non-linear.

E) Yes, there is evidence that the relationship between lackpf and lnftmpop is
nonlinear. The t-statistic for lackpf2 in regression 3 is -3.14, so at the 5%
significance level we can reject the null hypothesis that the coefficient on lackpf2 is
0 meaning the coefficient on lackpf2 is statistically significant. This t-test thus tells
us that the relationship between lackpf and lnftmpop is non-linear.

F) Performing an F-test on “other regional dummies” we get an F-statistic of 0.81,

which is not statistically significant at the 5% level. Using the test, we can reject the
null hypothesis that the coefficients on “other regional dummies” are all zero at the
5% level. We have 4 restrictions because the q-value we obtained was 4, and the
critical value was 2.27.

G) The coefficient on ethnic in regression 4 is positive but it is not statistically

significant because it has a t-statistic of .68. However, the sign of the coefficient on
ethnic being positive means that if all else is held constant, as the measurement of
ethnic divisions increases, the number of deaths due to terrorism also increases.

H) The coefficient on religion in regression 4 is negative but it is not statistically

significant because it has a t-statistic of -1.28. However, the sign of the coefficient
on religion being negative means that if all else is held constant, as the
measurement of religious divisions increases, the number of deaths due to terrorism
decreases.

I) Performing an F-test on ethnic and religion, we get an F-statistic of 1.01 which

means that we cannot reject the null hypothesis that neither ethnic nor religion
have statistically significant coefficients. In other words since we rejected the null
hypothesis we can’t reject the possibility that neither ethnic nor religion have any
effect on deaths due to terrorism.

J) Since ethnic and religion are not variable in regression 3, we cannot test anything
regarding ethnic and religion in the regression. The R2 formula for the
homoskedacicity only F-statistic, we get an F-statistic of .98. We still can’t reject the
null hypothesis that the coefficients on both variables equal 0. We have no reason
to believe that the standard errors are normally distributed so it wouldn’t be
appropriate to use this formula.

K) We can see by using the lincom command that changing the value of lackpf from
7 to 5 in regression 4 has the effect of changing lnftmpop by of 1.1567. This means
that by changing lackpf but holding all other values constant, lnftmpop increases by
1.1567. This means that starting from the initial position of having extremely limited
political freedoms, if we were to increase political freedoms, this would lead to more
deaths due to terrorism.

L) Using the lincom command we calculate 95% CI to be [-.0223584, 2.335755].

M)
 -1.5 -2
Fitted values
-2.5 -3

0 2 4 6 8
lackpf

The relationship is maximized at roughly 4.5 lackpf.

N) The relationship appears to be quadratic. The relationship as seen in the graph

from part M) above leads us to believe that as political freedoms increase initially so
do the number of deaths due to terrorism, deaths due to terrorism seem to peak at
a medium level of political freedoms and then decrease when there are a lot of
political freedoms. This is consistent with our hypothesis from part E) in problem 1.