Econometrics - the Effect of Personal Income, Bank Lending Rate, Ppi, M2 Money Supply and Exchange Rate on Cpi in American Economy

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ECONOMETRICS PROJECT

THE EFFECT OF PERSONAL INCOME, BANK LENDING RATE, PPI, M2 MONEY SUPPLY AND EXCHANGE RATE ON CPI IN AMERICAN ECONOMY

ACKNOWLEDGMENT

First of all, we would like to give many thanks to our teachers, Ms Dieu Linh and Mr Hwun Choi for guiding us throughout this project. We had some difficulties in doing this task, but he patiently explained to us until we understand and know what we are supposed to do with the project work.

Then we would like to thank our families, for giving us the strength and health to do this project work until it has done. They provide us everything, such as money, to buy anything that is related to this project work and their advice, which is the most needed for this project. Internet, books, computers and all that are our sources to complete this project. They also supported and encouraged us to complete this task so that we will not procrastinate in doing it.

Last but not least, our friends who were doing this project with me and sharing our ideas. They were helpful that when we combined and discussed together, we had this task done.

Contents

I. INTRODUCTION4
1.Economic theory5
2.Data analysis6
3.Data table9
4.Choosing the model12
III. TEST OF SIGNIFICANCE15
1.Hypothesis testing:17
IV. TESTING FOR ERRORS17
1.Multicollinearity17
2.Heteroschedasticity18
3.Autocorrelation21
V. LIMITATIONS AND CONCLUSION22
1.Limitations22
2.Conclusion22
References24

I. INTRODUCTION
Inflation is all the time one of the burning economic issues that generates the most concern from the society. So far, economists have developed a more specific concept called Consumer Price Index (CPI) as a main statistical indicator to gauge the inflation rate in a certain nation through its percentage change. Being stated by Mankiw in “Principle of Economics” (2009), CPI is the measure of the overall costs of goods and services bought by a typical consumer. Besides, the American economy attracts a lot of attention from people over the world and us, thus this research only deals with data from the America.

A CPI can be used to adjust for the effect of inflation towards the real value of wages, pension; or for regulating prices, deflating monetary magnitudes to show changes in real values. In most countries, the CPI is, along with the population growth rate, one of the most closely watched national economic statistics. Understanding the significant implications of CPI, economists in all places have tried their best to not only calculate but also predict its behavior. Undoubtedly, CPI’s changes are such a norm in the real economic world; however, what are the main causes? Put it in another words, what are the main variables resulting in considerable impacts on a national CPI? In the sake for a satisfied answer, our group has developed this economic model considering a bunch of factors that we perceive to have appropriate relationship to our target indicator CPI.

In the first place, it is the net income (earning per capita) that counts a prominent variable. An increase in net income can facilitate people’s demand for consuming products and services. Consequently, CPI is on the rise. The same ideology is applied to the opposite way of thinking.

What’s more is the bank loan interest rate. Interest rates are increased to moderate demand and then inflation; and they are reduced to stimulate demand, causing higher inflation. Additionally, inflation is closely linked to CPI. Hence, we can conclude that if lending interest is higher, CPI is lower as reduction of money demand or spending and vice versa.

Another important variable is M2 money stock – one among three components of money supply (MS). In fact, MS is linked directly to the inflation rate in a country. An increase in amount of M2 in an economy will go along with the increase in consumption. The explanation could be: consumers feel richer with larger amount of money in hands...
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