The African Business Review May-Jun 2014 | Page 31

E(εi,t) = 0
E(εi,t εi,s )=σ2E si t=s etE(εi,t εi,s)=0 si t ≠ s
Implying E(εi,t ε’i) = σ2EIT where IT denotes the identity matrix
(Ti,Ti)
E(εi,t εj,s) = 0 whatever j ≠ s and whatever (t,s)

Findings and discussion

of hypotheses:
H0 : E(μi/Xi) = 0 ( the random effects estimators are non-biased)

H1 : E(μi/Xi) ≠ 0 (the random effects estimators are biased).

μi denotes the individual stochastic component.
The P-values associated to the x2(6) statistic within our estimations
is about 0.0000 [x2(6) = 51.96] so we conclude that the fixed effect
estimator is more consistent to our model.
Our model is therefore written as follows:

INFit = αi + β1 (DEM)it + β2 (POLSTAB)it + β3 (MONgrowth)it +
β4 (LnRES)it + β5 (Growth)it + β6 (Trade)it + εit (2)
Where αi is the unknown intercept for each entity. αi = α + μi and
α refers to the fixed component. We assume that residuals εit are
independent, identically distributed (iid) and fulfils the following
conditions, whatever i C [1, N] and t C [1, Ti]:

The estimation method that we followed is to apply OLS (Least
Square Dummy Variables) to our model, in which we have
introduced a dummy variable for each country. The objective is to
estimate our fixed effects model after correcting the (t) of Student
from heteroscedasticty using the White method. This method
provides the same values for the parameters estimated by OLS,
the difference lies in the estimated standard deviations. Correcting
errors from heteroscedasticity provides robust estimators. The
estimations results for 124 countries and for the period 19962012 are found overleaf (Table 1)

The Fisher-test [F(6,1744) = 8.34] indicates that our
explanatory variables are jointly significant at 1% level and the
R-Squared value indicates that they explain 30% of the amount
of variance of inflation. The signs in the coefficients indicate
that greater growth of money and quasi- money, and greater
trade openness is associated to more inflation. However, greater
growth of GDP, of total reser ٕ́