INTRODUCTION
In this chapter, we used econometric method in order to verify
the second provisional answer in the research proposal. To reach targeted
goals, the researcher has developed different point like: introduction to
econometrics, specification of the model, expected sign, data processing, model
estimation and diagnostic tests by using the series collected in the period of
1995 to 2015.
The econometric methodology encompasses the following steps:
+ Statement of the theory
+ Specification of the mathematical model of the theory
+ Specification of the econometrics model
+ Obtaining data
+ Estimation of the parameters of the econometric model
+ Hypothesis testing
+ Forecasting or prediction
+ Use of the model for control of policy purpose
Econometric uses application of mathematical and statistics to
economic data in order to support models
constructed by mathematical economics and obtain numerical
results and to analyze the economic
phenomena. Econometrics quantifies the theoretical phenomena to
test the existence of the relationship
and then specifies exact form. Econometrics begins formulating
econometrics model. In this chapter,
we shall be testing the impact of income, interest rate;
inflation rate and exchange rate on gross
consumption expenditure in Rwanda using econometrics software,
find out economic interpretation on
the data obtained and propose the suggestions and prediction.
3.1 Model specification
The analysis of the economic phenomena is based on some
underlying logical structure known as a model. The model is a simplified
version of the reality: the model describes the behavior of the variables in
the system and it is the basic framework of the analysis. The model is in the
form of equations,
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composed by dependent variable and independent variables which
are related. The startup of the model is the specification of a mathematical
model. The mathematical model is an equation that expresses relationship
between depend variable and independent variables: changes in dependent
variable are explained 100% by changes occurred in independent variables. Once
the researcher assumed that all changes in dependent variable are not 100%
explained by changes in independent variables, the researcher has added on
mathematical model a term to represent other factors that may have influence on
the dependent variable. The model becomes an econometric model because of this
error term. Normally we don't find a meant relationship among variables that is
why we introduce a disturbance term or error term to represent other factors
that may have influence on dependent variable. The model to be estimated
concerns the determinants affecting aggregate consumption expenditure in
Rwanda. Hence the Gross Consumption Expenditure (GCE) is the dependent variable
and other variables are independent, the GCE is hypothetically assumed to be a
function of consumption of household at current prices.
3.1.1 Hypothesis of the model
Theoretically, macroeconomic references predict that there is
positive correlation between consumption
and income, a negative correlation between consumption and
interest rate a negative correlation between
consumption and inflation and also a negative correlation between
consumption between consumption
and exchange rate. The variables of the model are initially the
consumption function modeled in the
following form:
C=C0+C1Yd
For our case, the gross consumption function is proposed to be
modeled in the following form: GCE:
GCE= P0 +P1GDP+P2INT+P3INF+P4EXR+ut
Where: GCE: The gross consumption expenditure
f30= the intercept
f31, f32, f33 and f34: The coefficients of the model of
coefficients of regression
GDP: The gross domestic product
INT: The lending Interest rate
INF: The inflation rate
EXR: The exchange rate
ut: Error term of t period
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