# Economics Question. Need Help. Urgent!!! Watch

1. Hi folks,

I've got a question. Just done basic regression analysis on growth rates and the public deficit in the UK. Now I am struggling to link my results to theory. Keynesian theory would obviously suggest a rise in growth to be the result of an increased public deficit.
The data ist from the WEO, so Y is Growth in % of GDP and X is government net lending/borrowing.
Using the years 1999 onwards, the result is that Growth is
Y=3.33+0.4X
So, this is the first question: Is a deficit going to be represented in the X-values as a negative figure? That is what I have been assuming. Then however, that means that a deficit would actually lower growth. I am pretty stuck and my lecturer has not managed to explain it to me.
Thanks for helping!!!!
2. Personally I find your decision to make your regressor, public deficit, questionable. Economic intuition would tell you that whether a government ran a deficit or surplus would not be a determinant of growth. So in this case a surplus & deficit could lead to growth so essentially you're just forcing linearity in your model.

A better form would be to have X as just simply government expenditure and work from your simply demand equation. Or if you really want to have 'bugdet deficit' maybe redefine some new variables.
3. Thanks for the reply. I see what you mean and although it is only a linear regression and therefore limited in its explanatory power, that is what we are asked to do in the question. In that situation, what would you conclude? I see your point that the Keynesian idea is being forced into this particular format and these particular variables but thats what Ive got to work with.
4. What is the t-stat ( and number of observations?)
5. N=12

calculated t-values for
beta1=5.35
beta2=3.56
6. From what I can see the coefficient won't change but a negative X value would represent a deficit. Since your model is very simple and quite crude, I wouldn't cross reference with your economic intuition too much. Also keep in mind that your data will show growth with every year there was a surplus, so the correlation will be high. So it's natural your model would pull you into that direction.
7. (Original post by yoyo462001)
Also keep in mind that your data will show growth with every year there was a surplus, so the correlation will be high. So it's natural your model would pull you into that direction.
Would you say that a possible time gap between the implimentation and the actual effects of deficit spending can be part of an explanation of the difference in theory and results??
8. I agree with yoyo on this - a deficit is more likely to be the result of a recession, or slowdown in growth, than a cause of growth.....if you try to regress this with the UK you will find that in the boom periods there are small surpluses, or small deficits, and in the recessions there are large deficits, so you are going to find it hard to show that deficits have any explanatory power in economic growth...
9. (Original post by Frankfurt)
Hi folks,

I've got a question. Just done basic regression analysis on growth rates and the public deficit in the UK. Now I am struggling to link my results to theory. Keynesian theory would obviously suggest a rise in growth to be the result of an increased public deficit.
The data ist from the WEO, so Y is Growth in % of GDP and X is government net lending/borrowing.
Using the years 1999 onwards, the result is that Growth is
Y=3.33+0.4X
So, this is the first question: Is a deficit going to be represented in the X-values as a negative figure? That is what I have been assuming. Then however, that means that a deficit would actually lower growth. I am pretty stuck and my lecturer has not managed to explain it to me.
Thanks for helping!!!!
You need to add explnatory variables, major omitted variable bias right now. You can't just run a growth regression with 1 explanatroy variable. There are so many things that influence growth that your error will be out of control.

I would speak to your econometrics lecturer to discuss this.
10. Thanks for all the replies. Might attempt a multivariate model to achieve more realistic results.

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Updated: December 2, 2010
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