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Application of Multiple Regression Models for Lithuanian inflation

Application of Multiple Regression Models for Lithuanian inflation.

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Application of Multiple Regression Models for Lithuanian inflation

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  1. Application of Multiple Regression Models for Lithuanian inflation

  2. Inflation is one of the crucial modern macroeconomic problems. As a statistical concept, inflation is based on measuring net changes in prices using harmonized consumer price index (HCPI). HCPI is the main indicator of inflation. The Department of Statistics to the Government of the Republic of Lithuania declare 12, 38 and 93 common groups of goods and services of HCPI. In this task we use 12 common groups. V(1) – Food products and non-alcoholic beverages; V(2) – Alcoholic drinks and tobacco products; V(3) – Clothing and footwear; V(4) – Housing, water, electricity, gas and other fuels; V(5) – Furnishings, household equipment and routine maintenance; V(6) – Health care; V(7) – Transport; V(8) – Communications; V(9) – Recreation and culture; V(10) – Education; V(11) – Hotels, cafes and restaurants; V(12) – Miscellaneous goods and services. .

  3. The model The Multivariate time series model wasproposed for Lithuanian inflation modelling. Thus we define a VECM model given as: where:

  4. The Dataset(1)

  5. The Dataset(2)

  6. The Dataset(3)

  7. Augmented Dickey-Fuller and Phillips-Perron test statistics

  8. The VAR model First we undertake a VAR lag Order selection process. We adopt the AIC criteria and use 8 lags.

  9. The VECM model(1) A natural progression from a VAR representation is the VECM model, especially when the level series are non-stationary. We initially test for the rank of the cointegration using the methodology by Johansen (1988).

  10. The VECM model(2) The normalized cointegration coefficients only load on the V(9). Thus we have:

  11. The VECM model(3)

  12. The VECM model(4)

  13. Conclusion • Vector error correction (VECM (7,11)) model of Lithuanian inflation processes is investigated and proposed for the inflation modelling. • The VECM (7,11) model describes short-term relationships taking into account long-run developmentamong all 12 common HCPI groups. • According to the Macroeconomics theory, inflation is caused not only by price changes of common HCPI groups, but by other economic indicators (such us oil prices index, GDP, interest rates, etc.) too. To get better modelling results and to predict better forecasts it is useful to include other economic indicators into the model, in the future.

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