Econometric Methodology

CHAPTER THREE

DATA AND METHODOLOGY

3.0 Introduction This chapter 3 presents on the discussion of econometric methodology that will be employed throughout this study. For instance, augmented Dickey- Fuller unit root test (1979), Dickey- Fuller generalized least square unit root test, the modified ADF by Elliot et al. (1996), Johansen- Juselius Cointegration test (1990), Granger- causality test in vector error correlation (VECM) model and Diagnostic test. Each of the abovementioned econometric methods will be defined further in details. Entirely the methods were used to investigate the impacts of independent indicators towards agriculture production in Malaysia from year 1983 to 2013. The first section of this study is about the model of

It implements the modified Dickey- Fuller t test suggested by Elliott, Rothenberg, and Stock (1996). Fundamentally, the test is an augmented Dickey- Fuller test; alike to the test executed by Stata’s dfuller command, excluding that the time series is transformed via a generalized least square (GLS) regression before carrying out the test. Elliott, Rothenberg, and Stock and later studies have shown that this test significantly greater power than the earlier versions of the augmented Dickey- Fuller test. DFGLS implements the test for the series of models that comprise of 1 to k lags of the first differenced, detrended variable, where k can be set by the user or by the technique described in Schwert (1989). Stock and Watson (Introduction to Econemetrics, 2nd ed. 2007, 650- 655) suggests an brilliant argument of the approach. As discussed in dfuller, the augmented Dickey- Fuller test involves fitting a regression of the

After determine the stationary of the variables, Johansen cointegration test is applied to test the cointegration between the variables. After cointegration vectors are detected, Vector Error Correction Model (VECM) test is applied to test the long-run relationship between the independents variables and dependent variable. Then, diagnostic test is employed to examine the reliability of ECT.

4.1 Result of Unit Root