Question 3 (20 points) that analyzed the dynamics of fertility The following is

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Question 3 (20 points) that analyzed the dynamics of fertility The following is the VECM result from a study variables and its determinants. These were carried out for four structural and policy national (er), female labor force participation rate (flfp), gross gnipp and female tertiary education enrolment rate (feet) sample period of 1970-2012 in Malaysia. Table 3: Granger Causality Test statistics f-statistics Dependent value Variables: ECT (et ert nippr eet 0.03 2.18 0.20 0.28 Afert [1.63] (0.14) (0.65) (0.60) 0.23 0.19 0.11 6.31 (0.63) [1.30] (0.74) (0.01) 5.45 0.55 -0.02 0.09 Agnippr (0.02) (0.46) [-2.50] (0.77) 0.26 0.38 0.68 -0.20 0.61 0.54 0.4 -0.60 Notes: Asterisks denote statistically significant at 5% level The ECTS were derived by normalizing the cointegrating vector on the dependent variables resulting in r (in our case 1) number of residuals for each VECM. t-statistics are the estimated t-statistics for ECTs testing the null that they are each statistically insignificant while statistics shows the asymptotic Granger causal estimations. a) What does the ECT coefficient shows? How fast is the adjustment to long run equilibrium as per above system (5 percent significant level)? 6 points b) Determine and discuss the direction of causality for the system above. (5 points) c) Draw up a diagram based on the causality pattern in (b) and suggest policy implication in this case. (6 points)

Explanation / Answer

a) an ECT describes how the time series adjusts to disequliibrium. ECT is considered reasonable if the range ios between 0 and 1. However, an ECT should be a neagtive number, a postive number is considered explosive and not reasonable. For Fertility rate ECT seems unreasonable since it is positive, but ECT under female labour force participation rate indicates that about 2% of diequlibrium is corrected in one year. Similarly for gross national income per capita 20% of disequlibrium is expecetd to be corrected in one year. For female tertiary education rate disequlibrium is expected to be corrected by 60% in a year.

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