Effects of Multicollinearity on the Estimation of Macroeconomic Variables by Using Data from Sudan

89 Pages Posted: 29 Jul 2011 Last revised: 14 Aug 2011

See all articles by Issam A.W. Mohamed

Issam A.W. Mohamed

Al-Neelain University - Department of Economics

Date Written: July 28, 2011

Abstract

The problem of multicollinearity in the assessments of coefficients is well established. However, it is rarely researched in the estimations of macroeconomic variables and economic performance of developing countries. Predicatively, it has impacts on the estimations of coefficients that should be used in economic decisions, strategic planning and if researchers are more industrious estimations of monetary supplies and demands. All such parameters are very basic and essential in economic plannings and their applications should be done not only in research but in ground applications of the specialized authorities, e.g., Ministries of Finance, Central Banks, Pricing Units, etc. However, that is rarely done and when carried out, the estimators can be inefficient, misestimated or have statistic problems such as multicollinearity, autoregressions or homoscedacity. All the former lead to misinterpretarions of the statistical and econometric results and if used in any of above-mentioned parameters can be erroneous. Wrong and misinterpreted coefficients, reversed signals or incorrect significance levels are expected. Thus using such coefficients is useless and lead to bad decisions. Truly, macroeconomic variables usually have correlations with each with variable degrees. However, the latter shows the erroneous estimations only when tested. The current text book focuses on building-up models for macroeconomic variables of Sudan with the possibilities that they have the multicollinearity problem. In the analysis the Ordinary Least Squares method is used besides the Ridge Regression to estimate the equations. The analysis revealed that there are multicollinearity when the production and consumption functions were estimated. However, investment, liquidity functions and monetary equilibrium did not have that problem. We recommend here that the utilization of OLS in the estimation can be beneficial and reliable.

Note: Downloadable document is in Arabic.

Keywords: Sudanese Economy, Multicollinearity, Macroeconomic Variables, OLD, Ridge Regression

JEL Classification: B22, B23, B29, C00, C11, C13, C19, C3, C30, C35, C39, C40, C50, C51, C52, C54, C55, C59

Suggested Citation

Mohamed, Issam A.W., Effects of Multicollinearity on the Estimation of Macroeconomic Variables by Using Data from Sudan (July 28, 2011). Available at SSRN: https://ssrn.com/abstract=1898351 or http://dx.doi.org/10.2139/ssrn.1898351

Issam A.W. Mohamed (Contact Author)

Al-Neelain University - Department of Economics ( email )

P.O. Box 12910-11111
Khartoum, Khartoum 11111
Sudan
249122548254 (Phone)

HOME PAGE: http://works.bepress.com/issamawmohamed/

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