Gretl User’s Guide

Gnu Regression, Econometrics and Time-series Library

Allin Cottrell
Department of Economics
Wake Forest University

Riccardo “Jack” Lucchetti

Dipartimento di Economia
Università Politecnica delle Marche

May, 2012
Permission is granted to copy, distribute and/or modify this document under the terms of the
GNU Free Documentation License, Version 1.1 or any later version published by the Free Software
Foundation (see http://www.gnu.org/licenses/fdl.html).
 Contents

1 Introduction 1
1.1 Features at a glance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Installing the programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

I Running the program 4

2 Getting started 5
2.1 Let’s run a regression . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Estimation output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 The main window menus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4 Keyboard shortcuts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.5 The gretl toolbar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

3 Modes of working 13
3.1 Command scripts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2 Saving script objects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.3 The gretl console . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.4 The Session concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

4 Data files 19
4.1 Data file formats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.2 Databases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.3 Creating a dataset from scratch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.4 Structuring a dataset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.5 Panel data specifics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.6 Missing data values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.7 Maximum size of data sets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.8 Data file collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

5 Special functions in genr 31

5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.2 Long-run variance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.3 Cumulative densities and p-values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.4 Retrieving internal variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

i
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5.5 The discrete Fourier transform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

6 Sub-sampling a dataset 36
6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.2 Setting the sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.3 Restricting the sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.4 Resampling and bootstrapping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

7 Graphs and plots 40

7.1 Gnuplot graphs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
7.2 Boxplots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

8 Discrete variables 45
8.1 Declaring variables as discrete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.2 Commands for discrete variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

9 Loop constructs 50
9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
9.2 Loop control variants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
9.3 Progressive mode . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
9.4 Loop examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

10 User-defined functions 58
10.1 Defining a function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
10.2 Calling a function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
10.3 Deleting a function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
10.4 Function programming details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
10.5 Function packages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
10.6 Memo: updating old-style functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

11 Gretl data types 76

11.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
11.2 Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
11.3 Scalars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
11.4 Matrices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
11.5 Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
11.6 Strings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
11.7 Bundles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
11.8 The life cycle of gretl objects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

12 Named lists and strings 82

12.1 Named lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
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12.2 Named strings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

13 Matrix manipulation 90
13.1 Creating matrices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
13.2 Empty matrices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
13.3 Selecting sub-matrices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
13.4 Matrix operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
13.5 Matrix–scalar operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
13.6 Matrix functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
13.7 Matrix accessors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
13.8 Namespace issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
13.9 Creating a data series from a matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
13.10 Matrices and lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
13.11 Deleting a matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
13.12 Printing a matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
13.13 Example: OLS using matrices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

14 Cheat sheet 107

14.1 Dataset handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
14.2 Creating/modifying variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
14.3 Neat tricks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

II Econometric methods 112

15 Robust covariance matrix estimation 113

15.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
15.2 Cross-sectional data and the HCCME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
15.3 Time series data and HAC covariance matrices . . . . . . . . . . . . . . . . . . . . . . . . 115
15.4 Special issues with panel data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
15.5 The cluster-robust estimator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

16 Panel data 122

16.1 Estimation of panel models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
16.2 Autoregressive panel models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

17 Dynamic panel models 128

17.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
17.2 Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
17.3 Replication of DPD results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
17.4 Cross-country growth example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
17.5 Memo: dpanel options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
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18 Nonlinear least squares 140

18.1 Introduction and examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
18.2 Initializing the parameters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
18.3 NLS dialog window . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
18.4 Analytical and numerical derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
18.5 Controlling termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
18.6 Details on the code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
18.7 Numerical accuracy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

19 Maximum likelihood estimation 145

19.1 Generic ML estimation with gretl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
19.2 Gamma estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
19.3 Stochastic frontier cost function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
19.4 GARCH models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
19.5 Analytical derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
19.6 Debugging ML scripts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
19.7 Using functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
19.8 Advanced use of mle: functions, analytical derivatives, algorithm choice . . . . . . . . 157

20 GMM estimation 162

20.1 Introduction and terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
20.2 OLS as GMM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
20.3 TSLS as GMM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
20.4 Covariance matrix options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
20.5 A real example: the Consumption Based Asset Pricing Model . . . . . . . . . . . . . . . . 167
20.6 Caveats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

21 Model selection criteria 172

21.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
21.2 Information criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

22 Time series filters 174

22.1 Fractional differencing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
22.2 The Hodrick–Prescott filter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
22.3 The Baxter and King filter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
22.4 The Butterworth filter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

23 Univariate time series models 178

23.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
23.2 ARIMA models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
23.3 Unit root tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
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23.4 Cointegration tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

23.5 ARCH and GARCH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

24 Vector Autoregressions 192

24.1 Notation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
24.2 Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
24.3 Structural VARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

25 Cointegration and Vector Error Correction Models 199

25.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
25.2 Vector Error Correction Models as representation of a cointegrated system . . . . . . . 200
25.3 Interpretation of the deterministic components . . . . . . . . . . . . . . . . . . . . . . . . 201
25.4 The Johansen cointegration tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
25.5 Identification of the cointegration vectors . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
25.6 Over-identifying restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
25.7 Numerical solution methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212

26 Multivariate models 216

26.1 The system command . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
26.2 Restriction and estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
26.3 System accessors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

27 Forecasting 221
27.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
27.2 Saving and inspecting fitted values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
27.3 The fcast command . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
27.4 Univariate forecast evaluation statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
27.5 Forecasts based on VAR models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
27.6 Forecasting from simultaneous systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224

28 The Kalman Filter 225

28.1 Preamble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
28.2 Notation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
28.3 Intended usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
28.4 Overview of syntax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
28.5 Defining the filter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
28.6 The kfilter function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
28.7 The ksmooth function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
28.8 The ksimul function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
28.9 Example 1: ARMA estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
28.10 Example 2: local level model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
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29 Numerical methods 237

29.1 BFGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
29.2 Newton–Raphson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238
29.3 Simulated Annealing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
29.4 Computing a Jacobian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

30 Discrete and censored dependent variables 246

30.1 Logit and probit models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246
30.2 Ordered response models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
30.3 Multinomial logit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
30.4 Bivariate probit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
30.5 The Tobit model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
30.6 Interval regression . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
30.7 Sample selection model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256
30.8 Count data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
30.9 Duration models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258

31 Quantile regression 266

31.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
31.2 Basic syntax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
31.3 Confidence intervals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
31.4 Multiple quantiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
31.5 Large datasets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268

32 Nonparametric methods 270

32.1 Locally weighted regression (loess) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
32.2 The Nadaraya–Watson estimator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

III Technical details 275

33 Gretl and TEX 276

33.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276
33.2 TEX-related menu items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276
33.3 Fine-tuning typeset output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278
33.4 Installing and learning TEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281

34 Gretl and R 282

34.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
34.2 Starting an interactive R session . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
34.3 Running an R script . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
34.4 Taking stuff back and forth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286
Contents vii

34.5 Interacting with R from the command line . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

34.6 Performance issues with R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
34.7 Further use of the R library . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291

35 Gretl and Ox 292

35.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292
35.2 Ox support in gretl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292
35.3 Illustration: replication of DPD model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294

36 Gretl and Octave 296

36.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296
36.2 Octave support in gretl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296
36.3 Illustration: spectral methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296

37 Gretl and Stata 300

38 Troubleshooting gretl 301

38.1 Bug reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301
38.2 Auxiliary programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302

39 The command line interface 303

IV Appendices 304

A Data file details 305

A.1 Basic native format . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305
A.2 Traditional ESL format . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305
A.3 Binary database details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306

B Data import via ODBC 308

B.1 ODBC support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
B.2 ODBC base concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
B.3 Syntax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
B.4 Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311

C Building gretl 314

C.1 Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314
C.2 Build instructions: a step-by-step guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314

D Numerical accuracy 319

E Related free software 320

Contents viii

F Listing of URLs 321

Bibliography 322
 Chapter 1

Introduction

1.1 Features at a glance

Gretl is an econometrics package, including a shared library, a command-line client program and a
graphical user interface.

User-friendly Gretl offers an intuitive user interface; it is very easy to get up and running with
econometric analysis. Thanks to its association with the econometrics textbooks by Ramu
Ramanathan, Jeffrey Wooldridge, and James Stock and Mark Watson, the package offers many
practice data files and command scripts. These are well annotated and accessible. Two other
useful resources for gretl users are the available documentation and the gretl-users mailing
list.

Flexible You can choose your preferred point on the spectrum from interactive point-and-click to
batch processing, and can easily combine these approaches.

Cross-platform Gretl’s “home” platform is Linux but it is also available for MS Windows and Mac
OS X, and should work on any unix-like system that has the appropriate basic libraries (see
Appendix C).

Open source The full source code for gretl is available to anyone who wants to critique it, patch it,
or extend it. See Appendix C.

Sophisticated Gretl offers a full range of least-squares based estimators, either for single equations
and for systems, including vector autoregressions and vector error correction models. Sev-
eral specific maximum likelihood estimators (e.g. probit, ARIMA, GARCH) are also provided
natively; more advanced estimation methods can be implemented by the user via generic
maximum likelihood or nonlinear GMM.

Extensible Users can enhance gretl by writing their own functions and procedures in gretl’s script-
ing language, which includes a wide range of matrix functions.

Accurate Gretl has been thoroughly tested on several benchmarks, among which the NIST refer-
ence datasets. See Appendix D.

Internet ready Gretl can access and fetch databases from a server at Wake Forest University. The
MS Windows version comes with an updater program which will detect when a new version is
available and offer the option of auto-updating.

International Gretl will produce its output in English, French, Italian, Spanish, Polish, Portuguese,
German, Basque, Turkish or Russian depending on your computer’s native language setting.

1.2 Acknowledgements
The gretl code base originally derived from the program ESL (“Econometrics Software Library”),
written by Professor Ramu Ramanathan of the University of California, San Diego. We are much in
debt to Professor Ramanathan for making this code available under the GNU General Public Licence
and for helping to steer gretl’s early development.

1
Chapter 1. Introduction 2

We are also grateful to the authors of several econometrics textbooks for permission to package for
gretl various datasets associated with their texts. This list currently includes William Greene, au-
thor of Econometric Analysis; Jeffrey Wooldridge (Introductory Econometrics: A Modern Approach);
James Stock and Mark Watson (Introduction to Econometrics); Damodar Gujarati (Basic Economet-
rics); Russell Davidson and James MacKinnon (Econometric Theory and Methods); and Marno Ver-
beek (A Guide to Modern Econometrics).
GARCH estimation in gretl is based on code deposited in the archive of the Journal of Applied
Econometrics by Professors Fiorentini, Calzolari and Panattoni, and the code to generate p-values
for Dickey–Fuller tests is due to James MacKinnon. In each case we are grateful to the authors for
permission to use their work.
With regard to the internationalization of gretl, thanks go to Ignacio Díaz-Emparanza (Spanish),
Michel Robitaille and Florent Bresson (French), Cristian Rigamonti (Italian), Tadeusz Kufel and Pawel
Kufel (Polish), Markus Hahn and Sven Schreiber (German), Hélio Guilherme and Henrique Andrade
(Portuguese), Susan Orbe (Basque), Talha Yalta (Turkish) and Alexander Gedranovich (Russian).
Gretl has benefitted greatly from the work of numerous developers of free, open-source software:
for specifics please see Appendix C. Our thanks are due to Richard Stallman of the Free Software
Foundation, for his support of free software in general and for agreeing to “adopt” gretl as a GNU
program in particular.
Many users of gretl have submitted useful suggestions and bug reports. In this connection par-
ticular thanks are due to Ignacio Díaz-Emparanza, Tadeusz Kufel, Pawel Kufel, Alan Isaac, Cri
Rigamonti, Sven Schreiber, Talha Yalta, Andreas Rosenblad, and Dirk Eddelbuettel, who maintains
the gretl package for Debian GNU/Linux.

1.3 Installing the programs

Linux
On the Linux1 platform you have the choice of compiling the gretl code yourself or making use of a
pre-built package. Building gretl from the source is necessary if you want to access the development
version or customize gretl to your needs, but this takes quite a few skills; most users will want to
go for a pre-built package.
Some Linux distributions feature gretl as part of their standard offering: Debian, for example, or
Ubuntu (in the universe repository). If this is the case, all you need to do is install gretl through
your package manager of choice (e.g. synaptic).
Ready-to-run packages are available in rpm format (suitable for Red Hat Linux and related systems)
on the gretl webpage http://gretl.sourceforge.net.
However, we’re hopeful that some users with coding skills may consider gretl sufficiently interest-
ing to be worth improving and extending. The documentation of the libgretl API is by no means
complete, but you can find some details by following the link “Libgretl API docs” on the gretl home-
page. People interested in the gretl development are welcome to subscribe to the gretl-devel mailing
list.
If you prefer to compile your own (or are using a unix system for which pre-built packages are not
available), instructions on building gretl can be found in Appendix C.

MS Windows
The MS Windows version comes as a self-extracting executable. Installation is just a matter of
downloading gretl_install.exe and running this program. You will be prompted for a location
to install the package.
1 In this manual we use “Linux” as shorthand to refer to the GNU/Linux operating system. What is said herein about

Linux mostly applies to other unix-type systems too, though some local modifications may be needed.
Chapter 1. Introduction 3

Updating
If your computer is connected to the Internet, then on start-up gretl can query its home website
at Wake Forest University to see if any program updates are available; if so, a window will open
up informing you of that fact. If you want to activate this feature, check the box marked “Tell me
about gretl updates” under gretl’s “Tools, Preferences, General” menu.
The MS Windows version of the program goes a step further: it tells you that you can update gretl
automatically if you wish. To do this, follow the instructions in the popup window: close gretl
then run the program titled “gretl updater” (you should find this along with the main gretl program
item, under the Programs heading in the Windows Start menu). Once the updater has completed
its work you may restart gretl.
 Part I

Running the program

4
 Chapter 2

Getting started

2.1 Let’s run a regression

This introduction is mostly angled towards the graphical client program; please see Chapter 39
below and the Gretl Command Reference for details on the command-line program, gretlcli.
You can supply the name of a data file to open as an argument to gretl, but for the moment let’s
not do that: just fire up the program.1 You should see a main window (which will hold information
on the data set but which is at first blank) and various menus, some of them disabled at first.
What can you do at this point? You can browse the supplied data files (or databases), open a data
file, create a new data file, read the help items, or open a command script. For now let’s browse the
supplied data files. Under the File menu choose “Open data, Sample file”. A second notebook-type
window will open, presenting the sets of data files supplied with the package (see Figure 2.1). Select
the first tab, “Ramanathan”. The numbering of the files in this section corresponds to the chapter
organization of Ramanathan (2002), which contains discussion of the analysis of these data. The
data will be useful for practice purposes even without the text.

Figure 2.1: Practice data files window

If you select a row in this window and click on “Info” this opens a window showing information on
the data set in question (for example, on the sources and definitions of the variables). If you find
a file that is of interest, you may open it by clicking on “Open”, or just double-clicking on the file
name. For the moment let’s open data3-6.

+ In gretl windows containing lists, double-clicking on a line launches a default action for the associated list
entry: e.g. displaying the values of a data series, opening a file.
1 For convenience we refer to the graphical client program simply as gretl in this manual. Note, however, that the

specific name of the program differs according to the computer platform. On Linux it is called gretl_x11 while on MS
Windows it is gretlw32.exe. On Linux systems a wrapper script named gretl is also installed — see also the Gretl
Command Reference.

5
Chapter 2. Getting started 6

This file contains data pertaining to a classic econometric “chestnut”, the consumption function.
The data window should now display the name of the current data file, the overall data range and
sample range, and the names of the variables along with brief descriptive tags — see Figure 2.2.

Figure 2.2: Main window, with a practice data file open

OK, what can we do now? Hopefully the various menu options should be fairly self explanatory. For
now we’ll dip into the Model menu; a brief tour of all the main window menus is given in Section 2.3
below.
gretl’s Model menu offers numerous various econometric estimation routines. The simplest and
most standard is Ordinary Least Squares (OLS). Selecting OLS pops up a dialog box calling for a
model specification — see Figure 2.3.

Figure 2.3: Model specification dialog

To select the dependent variable, highlight the variable you want in the list on the left and click
the arrow that points to the Dependent variable slot. If you check the “Set as default” box this
variable will be pre-selected as dependent when you next open the model dialog box. Shortcut:
double-clicking on a variable on the left selects it as dependent and also sets it as the default. To
select independent variables, highlight them on the left and click the green arrow (or right-click the
Chapter 2. Getting started 7

highlighted variable); to remove variables from the selected list, use the rad arrow. To select several
variable in the list box, drag the mouse over them; to select several non-contiguous variables, hold
down the Ctrl key and click on the variables you want. To run a regression with consumption as
the dependent variable and income as independent, click Ct into the Dependent slot and add Yt to
the Independent variables list.

2.2 Estimation output

Once you’ve specified a model, a window displaying the regression output will appear. The output
is reasonably comprehensive and in a standard format (Figure 2.4).

Figure 2.4: Model output window

The output window contains menus that allow you to inspect or graph the residuals and fitted
values, and to run various diagnostic tests on the model.
For most models there is also an option to print the regression output in LATEX format. See Chap-
ter 33 for details.
To import gretl output into a word processor, you may copy and paste from an output window,
using its Edit menu (or Copy button, in some contexts) to the target program. Many (not all) gretl
windows offer the option of copying in RTF (Microsoft’s “Rich Text Format”) or as LATEX. If you are
pasting into a word processor, RTF may be a good option because the tabular formatting of the
output is preserved.2 Alternatively, you can save the output to a (plain text) file then import the
file into the target program. When you finish a gretl session you are given the option of saving all
the output from the session to a single file.
Note that on the gnome desktop and under MS Windows, the File menu includes a command to
send the output directly to a printer.

+ When pasting or importing plain text gretl output into a word processor, select a monospaced or typewriter-
style font (e.g. Courier) to preserve the output’s tabular formatting. Select a small font (10-point Courier
should do) to prevent the output lines from being broken in the wrong place.
2 Note that when you copy as RTF under MS Windows, Windows will only allow you to paste the material into appli-

cations that “understand” RTF. Thus you will be able to paste into MS Word, but not into notepad. Note also that there
appears to be a bug in some versions of Windows, whereby the paste will not work properly unless the “target” application
(e.g. MS Word) is already running prior to copying the material in question.
Chapter 2. Getting started 8

2.3 The main window menus

Reading left to right along the main window’s menu bar, we find the File, Tools, Data, View, Add,
Sample, Variable, Model and Help menus.

• File menu

– Open data: Open a native gretl data file or import from other formats. See Chapter 4.
– Append data: Add data to the current working data set, from a gretl data file, a comma-
separated values file or a spreadsheet file.
– Save data: Save the currently open native gretl data file.
– Save data as: Write out the current data set in native format, with the option of using
gzip data compression. See Chapter 4.
– Export data: Write out the current data set in Comma Separated Values (CSV) format, or
the formats of GNU R or GNU Octave. See Chapter 4 and also Appendix E.
– Send to: Send the current data set as an e-mail attachment.
– New data set: Allows you to create a blank data set, ready for typing in values or for
importing series from a database. See below for more on databases.
– Clear data set: Clear the current data set out of memory. Generally you don’t have to do
this (since opening a new data file automatically clears the old one) but sometimes it’s
useful.
– Script files: A “script” is a file containing a sequence of gretl commands. This item
contains entries that let you open a script you have created previously (“User file”), open
a sample script, or open an editor window in which you can create a new script.
– Session files: A “session” file contains a snapshot of a previous gretl session, including
the data set used and any models or graphs that you saved. Under this item you can
open a saved session or save the current session.
– Databases: Allows you to browse various large databases, either on your own computer
or, if you are connected to the internet, on the gretl database server. See Section 4.2 for
details.
– Function files: Handles “function packages” (see Section 10.5), which allow you to access
functions written by other users and share the ones written by you.
– Exit: Quit the program. You’ll be prompted to save any unsaved work.

• Tools menu

– Statistical tables: Look up critical values for commonly used distributions (normal or
Gaussian, t, chi-square, F and Durbin–Watson).
– P-value finder: Look up p-values from the Gaussian, t, chi-square, F, gamma, binomial or
Poisson distributions. See also the pvalue command in the Gretl Command Reference.
– Distribution graphs: Produce graphs of various probability distributions. In the resulting
graph window, the pop-up menu includes an item “Add another curve”, which enables
you to superimpose a further plot (for example, you can draw the t distribution with
various different degrees of freedom).
– Test statistic calculator: Calculate test statistics and p-values for a range of common hy-
pothesis tests (population mean, variance and proportion; difference of means, variances
and proportions).
– Nonparametric tests: Calculate test statistics for various nonparametric tests (Sign test,
Wilcoxon rank sum test, Wilcoxon signed rank test, Runs test).
Chapter 2. Getting started 9

– Seed for random numbers: Set the seed for the random number generator (by default
this is set based on the system time when the program is started).
– Command log: Open a window containing a record of the commands executed so far.
– Gretl console: Open a “console” window into which you can type commands as you would
using the command-line program, gretlcli (as opposed to using point-and-click).
– Start Gnu R: Start R (if it is installed on your system), and load a copy of the data set
currently open in gretl. See Appendix E.
– Sort variables: Rearrange the listing of variables in the main window, either by ID number
or alphabetically by name.
– NIST test suite: Check the numerical accuracy of gretl against the reference results for
linear regression made available by the (US) National Institute of Standards and Technol-
ogy.
– Preferences: Set the paths to various files gretl needs to access. Choose the font in which
gretl displays text output. Activate or suppress gretl’s messaging about the availability
of program updates, and so on. See the Gretl Command Reference for further details.

• Data menu

– Select all: Several menu items act upon those variables that are currently selected in the
main window. This item lets you select all the variables.
– Display values: Pops up a window with a simple (not editable) printout of the values of
the selected variable or variables.
– Edit values: Opens a spreadsheet window where you can edit the values of the selected
variables.
– Add observations: Gives a dialog box in which you can choose a number of observations
to add at the end of the current dataset; for use with forecasting.
– Remove extra observations: Active only if extra observations have been added automati-
cally in the process of forecasting; deletes these extra observations.
– Read info, Edit info: “Read info” just displays the summary information for the current
data file; “Edit info” allows you to make changes to it (if you have permission to do so).
– Print description: Opens a window containing a full account of the current dataset, in-
cluding the summary information and any specific information on each of the variables.
– Add case markers: Prompts for the name of a text file containing “case markers” (short
strings identifying the individual observations) and adds this information to the data set.
See Chapter 4.
– Remove case markers: Active only if the dataset has case markers identifying the obser-
vations; removes these case markers.
– Dataset structure: invokes a series of dialog boxes which allow you to change the struc-
tural interpretation of the current dataset. For example, if data were read in as a cross
section you can get the program to interpret them as time series or as a panel. See also
section 4.4.
– Compact data: For time-series data of higher than annual frequency, gives you the option
of compacting the data to a lower frequency, using one of four compaction methods
(average, sum, start of period or end of period).
– Expand data: For time-series data, gives you the option of expanding the data to a higher
frequency.
– Transpose data: Turn each observation into a variable and vice versa (or in other words,
each row of the data matrix becomes a column in the modified data matrix); can be useful
with imported data that have been read in “sideways”.

• View menu
Chapter 2. Getting started 10

– Icon view: Opens a window showing the content of the current session as a set of icons;
see section 3.4.
– Graph specified vars: Gives a choice between a time series plot, a regular X–Y scatter
plot, an X–Y plot using impulses (vertical bars), an X–Y plot “with factor separation” (i.e.
with the points colored differently depending to the value of a given dummy variable),
boxplots, and a 3-D graph. Serves up a dialog box where you specify the variables to
graph. See Chapter 7 for details.
– Multiple graphs: Allows you to compose a set of up to six small graphs, either pairwise
scatter-plots or time-series graphs. These are displayed together in a single window.
– Summary statistics: Shows a full set of descriptive statistics for the variables selected in
the main window.
– Correlation matrix: Shows the pairwise correlation coefficients for the selected variables.
– Cross Tabulation: Shows a cross-tabulation of the selected variables. This works only if
at least two variables in the data set have been marked as discrete (see Chapter 8).
– Principal components: Produces a Principal Components Analysis for the selected vari-
ables.
– Mahalanobis distances: Computes the Mahalanobis distance of each observation from
the centroid of the selected set of variables.
– Cross-correlogram: Computes and graphs the cross-correlogram for two selected vari-
ables.

• Add menu Offers various standard transformations of variables (logs, lags, squares, etc.) that
you may wish to add to the data set. Also gives the option of adding random variables, and
(for time-series data) adding seasonal dummy variables (e.g. quarterly dummy variables for
quarterly data).

• Sample menu

– Set range: Select a different starting and/or ending point for the current sample, within
the range of data available.
– Restore full range: self-explanatory.
– Define, based on dummy: Given a dummy (indicator) variable with values 0 or 1, this
drops from the current sample all observations for which the dummy variable has value
0.
– Restrict, based on criterion: Similar to the item above, except that you don’t need a pre-
defined variable: you supply a Boolean expression (e.g. sqft > 1400) and the sample is
restricted to observations satisfying that condition. See the entry for genr in the Gretl
Command Reference for details on the Boolean operators that can be used.
– Random sub-sample: Draw a random sample from the full dataset.
– Drop all obs with missing values: Drop from the current sample all observations for
which at least one variable has a missing value (see Section 4.6).
– Count missing values: Give a report on observations where data values are missing. May
be useful in examining a panel data set, where it’s quite common to encounter missing
values.
– Set missing value code: Set a numerical value that will be interpreted as “missing” or “not
available”. This is intended for use with imported data, when gretl has not recognized
the missing-value code used.

• Variable menu Most items under here operate on a single variable at a time. The “active”
variable is set by highlighting it (clicking on its row) in the main data window. Most options
will be self-explanatory. Note that you can rename a variable and can edit its descriptive label
under “Edit attributes”. You can also “Define a new variable” via a formula (e.g. involving
Chapter 2. Getting started 11

some function of one or more existing variables). For the syntax of such formulae, look at the
online help for “Generate variable syntax” or see the genr command in the Gretl Command
Reference. One simple example:

foo = x1 * x2

will create a new variable foo as the product of the existing variables x1 and x2. In these
formulae, variables must be referenced by name, not number.

• Model menu For details on the various estimators offered under this menu please consult the
Gretl Command Reference. Also see Chapter 18 regarding the estimation of nonlinear models.

• Help menu Please use this as needed! It gives details on the syntax required in various dialog
entries.

2.4 Keyboard shortcuts

When working in the main gretl window, some common operations may be performed using the
keyboard, as shown in the table below.

Return Opens a window displaying the values of the currently selected variables: it is
the same as selecting “Data, Display Values”.
Delete Pressing this key has the effect of deleting the selected variables. A confirma-
tion is required, to prevent accidental deletions.
e Has the same effect as selecting “Edit attributes” from the “Variable” menu.
F2 Same as “e”. Included for compatibility with other programs.
g Has the same effect as selecting “Define new variable” from the “Variable”
menu (which maps onto the genr command).
h Opens a help window for gretl commands.
F1 Same as “h”. Included for compatibility with other programs.
r Refreshes the variable list in the main window.
t Graphs the selected variable; a line graph is used for time-series datasets,
whereas a distribution plot is used for cross-sectional data.

2.5 The gretl toolbar

At the bottom left of the main window sits the toolbar.

The icons have the following functions, reading from left to right:

1. Launch a calculator program. A convenience function in case you want quick access to a
calculator when you’re working in gretl. The default program is calc.exe under MS Win-
dows, or xcalc under the X window system. You can change the program under the “Tools,
Preferences, General” menu, “Programs” tab.

2. Start a new script. Opens an editor window in which you can type a series of commands to be
sent to the program as a batch.

3. Open the gretl console. A shortcut to the “Gretl console” menu item (Section 2.3 above).

4. Open the gretl session icon window.

Chapter 2. Getting started 12

5. Open a window displaying available gretl function packages.

6. Open this manual in PDF format.

7. Open the help item for script commands syntax (i.e. a listing with details of all available
commands).

8. Open the dialog box for defining a graph.

9. Open the dialog box for estimating a model using ordinary least squares.

10. Open a window listing the sample datasets supplied with gretl, and any other data file collec-
tions that have been installed.
 Chapter 3

Modes of working

3.1 Command scripts

As you execute commands in gretl, using the GUI and filling in dialog entries, those commands are
recorded in the form of a “script” or batch file. Such scripts can be edited and re-run, using either
gretl or the command-line client, gretlcli.
To view the current state of the script at any point in a gretl session, choose “Command log” under
the Tools menu. This log file is called session.inp and it is overwritten whenever you start a new
session. To preserve it, save the script under a different name. Script files will be found most easily,
using the GUI file selector, if you name them with the extension “.inp”.
To open a script you have written independently, use the “File, Script files” menu item; to create a
script from scratch use the “File, Script files, New script” item or the “new script” toolbar button.
In either case a script window will open (see Figure 3.1).

Figure 3.1: Script window, editing a command file

The toolbar at the top of the script window offers the following functions (left to right): (1) Save
the file; (2) Save the file under a specified name; (3) Print the file (this option is not available on all
platforms); (4) Execute the commands in the file; (5) Copy selected text; (6) Paste the selected text;
(7) Find and replace text; (8) Undo the last Paste or Replace action; (9) Help (if you place the cursor
in a command word and press the question mark you will get help on that command); (10) Close
the window.
When you execute the script, by clicking on the Execute icon or by pressing Ctrl-r, all output is
directed to a single window, where it can be edited, saved or copied to the clipboard. To learn
more about the possibilities of scripting, take a look at the gretl Help item “Command reference,”

13
Chapter 3. Modes of working 14

or start up the command-line program gretlcli and consult its help, or consult the Gretl Command
Reference.
If you run the script when part of it is highlighted, gretl will only run that portion. Moreover, if you
want to run just the current line, you can do so by pressing Ctrl-Enter.1
Clicking the right mouse button in the script editor window produces a pop-up menu. This gives
you the option of executing either the line on which the cursor is located, or the selected region of
the script if there’s a selection in place. If the script is editable, this menu also gives the option of
adding or removing comment markers from the start of the line or lines.
The gretl package includes over 70 “practice” scripts. Most of these relate to Ramanathan (2002),
but they may also be used as a free-standing introduction to scripting in gretl and to various points
of econometric theory. You can explore the practice files under “File, Script files, Practice file” There
you will find a listing of the files along with a brief description of the points they illustrate and the
data they employ. Open any file and run it to see the output. Note that long commands in a script
can be broken over two or more lines, using backslash as a continuation character.
You can, if you wish, use the GUI controls and the scripting approach in tandem, exploiting each
method where it offers greater convenience. Here are two suggestions.

• Open a data file in the GUI. Explore the data — generate graphs, run regressions, perform
tests. Then open the Command log, edit out any redundant commands, and save it under
a specific name. Run the script to generate a single file containing a concise record of your
work.

• Start by establishing a new script file. Type in any commands that may be required to set
up transformations of the data (see the genr command in the Gretl Command Reference).
Typically this sort of thing can be accomplished more efficiently via commands assembled
with forethought rather than point-and-click. Then save and run the script: the GUI data
window will be updated accordingly. Now you can carry out further exploration of the data
via the GUI. To revisit the data at a later point, open and rerun the “preparatory” script first.

Scripts and data files

One common way of doing econometric research with gretl is as follows: compose a script; execute
the script; inspect the output; modify the script; run it again — with the last three steps repeated
as many times as necessary. In this context, note that when you open a data file this clears out
most of gretl’s internal state. It’s therefore probably a good idea to have your script start with an
open command: the data file will be re-opened each time, and you can be confident you’re getting
“fresh” results.
One further point should be noted. When you go to open a new data file via the graphical interface,
you are always prompted: opening a new data file will lose any unsaved work, do you really want
to do this? When you execute a script that opens a data file, however, you are not prompted. The
assumption is that in this case you’re not going to lose any work, because the work is embodied
in the script itself (and it would be annoying to be prompted at each iteration of the work cycle
described above).
This means you should be careful if you’ve done work using the graphical interface and then decide
to run a script: the current data file will be replaced without any questions asked, and it’s your
responsibility to save any changes to your data first.
1 This feature is not unique to gretl; other econometric packages offer the same facility. However, experience shows

that while this can be remarkably useful, it can also lead to writing dinosaur scripts that are never meant to be executed
all at once, but rather used as a chaotic repository to cherry-pick snippets from. Since gretl allows you to have several
script windows open at the same time, you may want to keep your scripts tidy and reasonably small.
Chapter 3. Modes of working 15

3.2 Saving script objects

When you estimate a model using point-and-click, the model results are displayed in a separate
window, offering menus which let you perform tests, draw graphs, save data from the model, and
so on. Ordinarily, when you estimate a model using a script you just get a non-interactive printout
of the results. You can, however, arrange for models estimated in a script to be “captured”, so that
you can examine them interactively when the script is finished. Here is an example of the syntax
for achieving this effect:

Model1 <- ols Ct 0 Yt

That is, you type a name for the model to be saved under, then a back-pointing “assignment arrow”,
then the model command. The assignment arrow is composed of the less-than sign followed by a
dash; it must be separated by spaces from both the preceding name and the following command.
The name for a saved object may include spaces, but in that case it must be wrapped in double
quotes:

"Model 1" <- ols Ct 0 Yt

Models saved in this way will appear as icons in the gretl icon view window (see Section 3.4) after
the script is executed. In addition, you can arrange to have a named model displayed (in its own
window) automatically as follows:

Model1.show

Again, if the name contains spaces it must be quoted:

"Model 1".show

The same facility can be used for graphs. For example the following will create a plot of Ct against
Yt, save it under the name “CrossPlot” (it will appear under this name in the icon view window),
and have it displayed:

CrossPlot <- gnuplot Ct Yt

CrossPlot.show

You can also save the output from selected commands as named pieces of text (again, these will
appear in the session icon window, from where you can open them later). For example this com-
mand sends the output from an augmented Dickey–Fuller test to a “text object” named ADF1 and
displays it in a window:

ADF1 <- adf 2 x1

ADF1.show

Objects saved in this way (whether models, graphs or pieces of text output) can be destroyed using
the command .free appended to the name of the object, as in ADF1.free.

3.3 The gretl console

A further option is available for your computing convenience. Under gretl’s “Tools” menu you will
find the item “Gretl console” (there is also an “open gretl console” button on the toolbar in the
main window). This opens up a window in which you can type commands and execute them one
by one (by pressing the Enter key) interactively. This is essentially the same as gretlcli’s mode of
operation, except that the GUI is updated based on commands executed from the console, enabling
you to work back and forth as you wish.
Chapter 3. Modes of working 16

In the console, you have “command history”; that is, you can use the up and down arrow keys to
navigate the list of command you have entered to date. You can retrieve, edit and then re-enter a
previous command.
In console mode, you can create, display and free objects (models, graphs or text) aa described
above for script mode.

3.4 The Session concept

gretl offers the idea of a “session” as a way of keeping track of your work and revisiting it later.
The basic idea is to provide an iconic space containing various objects pertaining to your current
working session (see Figure 3.2). You can add objects (represented by icons) to this space as you
go along. If you save the session, these added objects should be available again if you re-open the
session later.

Figure 3.2: Icon view: one model and one graph have been added to the default icons

If you start gretl and open a data set, then select “Icon view” from the View menu, you should see
the basic default set of icons: these give you quick access to information on the data set (if any),
correlation matrix (“Correlations”) and descriptive summary statistics (“Summary”). All of these
are activated by double-clicking the relevant icon. The “Data set” icon is a little more complex:
double-clicking opens up the data in the built-in spreadsheet, but you can also right-click on the
icon for a menu of other actions.
To add a model to the Icon view, first estimate it using the Model menu. Then pull down the File
menu in the model window and select “Save to session as icon. . . ” or “Save as icon and close”.
Simply hitting the S key over the model window is a shortcut to the latter action.
To add a graph, first create it (under the View menu, “Graph specified vars”, or via one of gretl’s
other graph-generating commands). Click on the graph window to bring up the graph menu, and
select “Save to session as icon”.
Once a model or graph is added its icon will appear in the Icon view window. Double-clicking on the
icon redisplays the object, while right-clicking brings up a menu which lets you display or delete
the object. This popup menu also gives you the option of editing graphs.

The model table

In econometric research it is common to estimate several models with a common dependent vari-
able — the models differing in respect of which independent variables are included, or perhaps in
respect of the estimator used. In this situation it is convenient to present the regression results
in the form of a table, where each column contains the results (coefficient estimates and standard
errors) for a given model, and each row contains the estimates for a given variable across the
models.
Chapter 3. Modes of working 17

In the Icon view window gretl provides a means of constructing such a table (and copying it in plain
text, LATEX or Rich Text Format). The procedure is outlined below. (The model table can also be built
non-interactively, in script mode. For details, see the entry for modeltab in the Gretl Command
Reference.)

1. Estimate a model which you wish to include in the table, and in the model display window,
under the File menu, select “Save to session as icon” or “Save as icon and close”.

2. Repeat step 1 for the other models to be included in the table (up to a total of six models).

3. When you are done estimating the models, open the icon view of your gretl session, by se-
lecting “Icon view” under the View menu in the main gretl window, or by clicking the “session
icon view” icon on the gretl toolbar.

4. In the Icon view, there is an icon labeled “Model table”. Decide which model you wish to
appear in the left-most column of the model table and add it to the table, either by dragging
its icon onto the Model table icon, or by right-clicking on the model icon and selecting “Add
to model table” from the pop-up menu.

5. Repeat step 4 for the other models you wish to include in the table. The second model selected
will appear in the second column from the left, and so on.

6. When you are finished composing the model table, display it by double-clicking on its icon.
Under the Edit menu in the window which appears, you have the option of copying the table
to the clipboard in various formats.

7. If the ordering of the models in the table is not what you wanted, right-click on the model
table icon and select “Clear table”. Then go back to step 4 above and try again.

A simple instance of gretl’s model table is shown in Figure 3.3.

Figure 3.3: Example of model table

The graph page

The “graph page” icon in the session window offers a means of putting together several graphs
for printing on a single page. This facility will work only if you have the LATEX typesetting system
Chapter 3. Modes of working 18

installed, and are able to generate and view either PDF or PostScript output. The output format
is controlled by your choice of program for compiling TEX files, which can be found under the
“Programs” tab in the Preferences dialog box (under the “Tools” menu in the main window). Usually
this should be pdflatex for PDF output or latex for PostScript. In the latter case you must have a
working set-up for handling PostScript, which will usually include dvips, ghostscript and a viewer
such as gv, ggv or kghostview.
In the Icon view window, you can drag up to eight graphs onto the graph page icon. When you
double-click on the icon (or right-click and select “Display”), a page containing the selected graphs
(in PDF or EPS format) will be composed and opened in your viewer. From there you should be able
to print the page.
To clear the graph page, right-click on its icon and select “Clear”.
As with the model table, it is also possible to manipulate the graph page via commands in script or
console mode — see the entry for the graphpg command in the Gretl Command Reference.

Saving and re-opening sessions

If you create models or graphs that you think you may wish to re-examine later, then before quitting
gretl select “Session files, Save session” from the File menu and give a name under which to save
the session. To re-open the session later, either

• Start gretl then re-open the session file by going to the “File, Session files, Open session”, or

• From the command line, type gretl -r sessionfile, where sessionfile is the name under which
the session was saved, or

• Drag the icon representing a gretl session file onto gretl.

 Chapter 4

Data files

4.1 Data file formats

gretl has its own format for data files. Most users will probably not want to read or write such files
outside of gretl itself, but occasionally this may be useful and full details on the file formats are
given in Appendix A.
gretl will read various other data formats.

• Plain text (ASCII) files. These can be brought in using gretl’s “File, Open Data, Import ASCII. . . ”
menu item, or the import script command. For details on what gretl expects of such files, see
Section 4.3.

• Comma-Separated Values (CSV) files. These can be imported using gretl’s “File, Open Data,
Import CSV. . . ” menu item, or the import script command. See also Section 4.3.

• Spreadsheets: MS Excel, Gnumeric and Open Document (ODS). These are also brought in us-
ing gretl’s “File, Open Data, Import” menu. The requirements for such files are given in Sec-
tion 4.3.

• Stata data files (.dta).

• SPSS data files (.sav).

• Eviews workfiles (.wf1).1

• JMulTi data files.

When you import data from the ASCII or CSV formats, gretl opens a “diagnostic” window, report-
ing on its progress in reading the data. If you encounter a problem with ill-formatted data, the
messages in this window should give you a handle on fixing the problem.
Note that gretl has a facility for writing out data in the native formats of GNU R, Octave, JMulTi and
PcGive (see Appendix E). In the GUI client this option is found under the “File, Export data” menu;
in the command-line client use the store command with the appropriate option flag.

4.2 Databases
For working with large amounts of data gretl is supplied with a database-handling routine. A
database, as opposed to a data file, is not read directly into the program’s workspace. A database
can contain series of mixed frequencies and sample ranges. You open the database and select
series to import into the working dataset. You can then save those series in a native format data
file if you wish. Databases can be accessed via gretl’s menu item “File, Databases”.
For details on the format of gretl databases, see Appendix A.
1 See http://www.ecn.wfu.edu/eviews_format/.

19
Chapter 4. Data files 20

Online access to databases

As of version 0.40, gretl is able to access databases via the internet. Several databases are available
from Wake Forest University. Your computer must be connected to the internet for this option to
work. Please see the description of the “data” command under gretl’s Help menu.

+ Visit the gretl data page for details and updates on available data.

Foreign database formats

Thanks to Thomas Doan of Estima, who made available the specification of the database format
used by RATS 4 (Regression Analysis of Time Series), gretl can handle such databases — or at least,
a subset of same, namely time-series databases containing monthly and quarterly series.
gretl can also import data from PcGive databases. These take the form of a pair of files, one
containing the actual data (with suffix .bn7) and one containing supplementary information (.in7).
In addition, gretl offers ODBC connectivity. Be warned: this feature is meant for somewhat ad-
vanced users; there is currently no GUI interface. Interested readers will find more info in appendix
B.

4.3 Creating a dataset from scratch

There are several ways of doing this:

1. Find, or create using a text editor, a plain text data file and open it with gretl’s “Import ASCII”
option.

2. Use your favorite spreadsheet to establish the data file, save it in Comma Separated Values
format if necessary (this should not be necessary if the spreadsheet format is MS Excel, Gnu-
meric or Open Document), then use one of gretl’s “Import” options.

3. Use gretl’s built-in spreadsheet.

4. Select data series from a suitable database.

5. Use your favorite text editor or other software tools to a create data file in gretl format inde-
pendently.

Here are a few comments and details on these methods.

Common points on imported data

Options (1) and (2) involve using gretl’s “import” mechanism. For gretl to read such data success-
fully, certain general conditions must be satisfied:

• The first row must contain valid variable names. A valid variable name is of 15 characters
maximum; starts with a letter; and contains nothing but letters, numbers and the underscore
character, _. (Longer variable names will be truncated to 15 characters.) Qualifications to the
above: First, in the case of an ASCII or CSV import, if the file contains no row with variable
names the program will automatically add names, v1, v2 and so on. Second, by “the first row”
is meant the first relevant row. In the case of ASCII and CSV imports, blank rows and rows
beginning with a hash mark, #, are ignored. In the case of Excel and Gnumeric imports, you
are presented with a dialog box where you can select an offset into the spreadsheet, so that
gretl will ignore a specified number of rows and/or columns.
Chapter 4. Data files 21

• Data values: these should constitute a rectangular block, with one variable per column (and
one observation per row). The number of variables (data columns) must match the number
of variable names given. See also section 4.6. Numeric data are expected, but in the case of
importing from ASCII/CSV, the program offers limited handling of character (string) data: if
a given column contains character data only, consecutive numeric codes are substituted for
the strings, and once the import is complete a table is printed showing the correspondence
between the strings and the codes.

• Dates (or observation labels): Optionally, the first column may contain strings such as dates,
or labels for cross-sectional observations. Such strings have a maximum of 8 characters (as
with variable names, longer strings will be truncated). A column of this sort should be headed
with the string obs or date, or the first row entry may be left blank.
For dates to be recognized as such, the date strings must adhere to one or other of a set of
specific formats, as follows. For annual data: 4-digit years. For quarterly data: a 4-digit year,
followed by a separator (either a period, a colon, or the letter Q), followed by a 1-digit quarter.
Examples: 1997.1, 2002:3, 1947Q1. For monthly data: a 4-digit year, followed by a period or
a colon, followed by a two-digit month. Examples: 1997.01, 2002:10.

CSV files can use comma, space or tab as the column separator. When you use the “Import CSV”
menu item you are prompted to specify the separator. In the case of “Import ASCII” the program
attempts to auto-detect the separator that was used.
If you use a spreadsheet to prepare your data you are able to carry out various transformations of
the “raw” data with ease (adding things up, taking percentages or whatever): note, however, that
you can also do this sort of thing easily — perhaps more easily — within gretl, by using the tools
under the “Add” menu.

Appending imported data

You may wish to establish a gretl dataset piece by piece, by incremental importation of data from
other sources. This is supported via the “File, Append data” menu items: gretl will check the new
data for conformability with the existing dataset and, if everything seems OK, will merge the data.
You can add new variables in this way, provided the data frequency matches that of the existing
dataset. Or you can append new observations for data series that are already present; in this case
the variable names must match up correctly. Note that by default (that is, if you choose “Open
data” rather than “Append data”), opening a new data file closes the current one.

Using the built-in spreadsheet

Under gretl’s “File, New data set” menu you can choose the sort of dataset you want to establish
(e.g. quarterly time series, cross-sectional). You will then be prompted for starting and ending dates
(or observation numbers) and the name of the first variable to add to the dataset. After supplying
this information you will be faced with a simple spreadsheet into which you can type data values. In
the spreadsheet window, clicking the right mouse button will invoke a popup menu which enables
you to add a new variable (column), to add an observation (append a row at the foot of the sheet),
or to insert an observation at the selected point (move the data down and insert a blank row.)
Once you have entered data into the spreadsheet you import these into gretl’s workspace using the
spreadsheet’s “Apply changes” button.
Please note that gretl’s spreadsheet is quite basic and has no support for functions or formulas.
Data transformations are done via the “Add” or “Variable” menus in the main gretl window.

Selecting from a database

Another alternative is to establish your dataset by selecting variables from a database.
Chapter 4. Data files 22

Begin with gretl’s “File, Databases” menu item. This has four forks: “Gretl native”, “RATS 4”,
“PcGive” and “On database server”. You should be able to find the file fedstl.bin in the file
selector that opens if you choose the “Gretl native” option — this file, which contains a large
collection of US macroeconomic time series, is supplied with the distribution.
You won’t find anything under “RATS 4” unless you have purchased RATS data.2 If you do possess
RATS data you should go into gretl’s “Tools, Preferences, General” dialog, select the Databases tab,
and fill in the correct path to your RATS files.
If your computer is connected to the internet you should find several databases (at Wake Forest
University) under “On database server”. You can browse these remotely; you also have the option
of installing them onto your own computer. The initial remote databases window has an item
showing, for each file, whether it is already installed locally (and if so, if the local version is up to
date with the version at Wake Forest).
Assuming you have managed to open a database you can import selected series into gretl’s workspace
by using the “Series, Import” menu item in the database window, or via the popup menu that ap-
pears if you click the right mouse button, or by dragging the series into the program’s main window.

Creating a gretl data file independently

It is possible to create a data file in one or other of gretl’s own formats using a text editor or
software tools such as awk, sed or perl. This may be a good choice if you have large amounts of
data already in machine readable form. You will, of course, need to study the gretl data formats
(XML format or “traditional” format) as described in Appendix A.

4.4 Structuring a dataset

Once your data are read by gretl, it may be necessary to supply some information on the nature of
the data. We distinguish between three kinds of datasets:

1. Cross section

2. Time series

3. Panel data

The primary tool for doing this is the “Data, Dataset structure” menu entry in the graphical inter-
face, or the setobs command for scripts and the command-line interface.

Cross sectional data

By a cross section we mean observations on a set of “units” (which may be firms, countries, in-
dividuals, or whatever) at a common point in time. This is the default interpretation for a data
file: if gretl does not have sufficient information to interpret data as time-series or panel data,
they are automatically interpreted as a cross section. In the unlikely event that cross-sectional data
are wrongly interpreted as time series, you can correct this by selecting the “Data, Dataset struc-
ture” menu item. Click the “cross-sectional” radio button in the dialog box that appears, then click
“Forward”. Click “OK” to confirm your selection.

Time series data

When you import data from a spreadsheet or plain text file, gretl will make fairly strenuous efforts
to glean time-series information from the first column of the data, if it looks at all plausible that
such information may be present. If time-series structure is present but not recognized, again you
2 See www.estima.com
Chapter 4. Data files 23

can use the “Data, Dataset structure” menu item. Select “Time series” and click “Forward”; select the
appropriate data frequency and click “Forward” again; then select or enter the starting observation
and click “Forward” once more. Finally, click “OK” to confirm the time-series interpretation if it is
correct (or click “Back” to make adjustments if need be).
Besides the basic business of getting a data set interpreted as time series, further issues may arise
relating to the frequency of time-series data. In a gretl time-series data set, all the series must
have the same frequency. Suppose you wish to make a combined dataset using series that, in their
original state, are not all of the same frequency. For example, some series are monthly and some
are quarterly.
Your first step is to formulate a strategy: Do you want to end up with a quarterly or a monthly data
set? A basic point to note here is that “compacting” data from a higher frequency (e.g. monthly) to
a lower frequency (e.g. quarterly) is usually unproblematic. You lose information in doing so, but
in general it is perfectly legitimate to take (say) the average of three monthly observations to create
a quarterly observation. On the other hand, “expanding” data from a lower to a higher frequency is
not, in general, a valid operation.
In most cases, then, the best strategy is to start by creating a data set of the lower frequency, and
then to compact the higher frequency data to match. When you import higher-frequency data from
a database into the current data set, you are given a choice of compaction method (average, sum,
start of period, or end of period). In most instances “average” is likely to be appropriate.
You can also import lower-frequency data into a high-frequency data set, but this is generally not
recommended. What gretl does in this case is simply replicate the values of the lower-frequency
series as many times as required. For example, suppose we have a quarterly series with the value
35.5 in 1990:1, the first quarter of 1990. On expansion to monthly, the value 35.5 will be assigned
to the observations for January, February and March of 1990. The expanded variable is therefore
useless for fine-grained time-series analysis, outside of the special case where you know that the
variable in question does in fact remain constant over the sub-periods.
When the current data frequency is appropriate, gretl offers both “Compact data” and “Expand
data” options under the “Data” menu. These options operate on the whole data set, compacting or
exanding all series. They should be considered “expert” options and should be used with caution.

Panel data
Panel data are inherently three dimensional — the dimensions being variable, cross-sectional unit,
and time-period. For example, a particular number in a panel data set might be identified as the
observation on capital stock for General Motors in 1980. (A note on terminology: we use the
terms “cross-sectional unit”, “unit” and “group” interchangeably below to refer to the entities that
compose the cross-sectional dimension of the panel. These might, for instance, be firms, countries
or persons.)
For representation in a textual computer file (and also for gretl’s internal calculations) the three
dimensions must somehow be flattened into two. This “flattening” involves taking layers of the
data that would naturally stack in a third dimension, and stacking them in the vertical dimension.
Gretl always expects data to be arranged “by observation”, that is, such that each row represents
an observation (and each variable occupies one and only one column). In this context the flattening
of a panel data set can be done in either of two ways:

• Stacked time series: the successive vertical blocks each comprise a time series for a given
unit.
• Stacked cross sections: the successive vertical blocks each comprise a cross-section for a
given period.

You may input data in whichever arrangement is more convenient. Internally, however, gretl always
stores panel data in the form of stacked time series.
Chapter 4. Data files 24

4.5 Panel data specifics

When you import panel data into gretl from a spreadsheet or comma separated format, the panel
nature of the data will not be recognized automatically (most likely the data will be treated as
“undated”). A panel interpretation can be imposed on the data using the graphical interface or via
the setobs command.
In the graphical interface, use the menu item “Data, Dataset structure”. In the first dialog box
that appears, select “Panel”. In the next dialog you have a three-way choice. The first two options,
“Stacked time series” and “Stacked cross sections” are applicable if the data set is already organized
in one of these two ways. If you select either of these options, the next step is to specify the number
of cross-sectional units in the data set. The third option, “Use index variables”, is applicable if the
data set contains two variables that index the units and the time periods respectively; the next step
is then to select those variables. For example, a data file might contain a country code variable and
a variable representing the year of the observation. In that case gretl can reconstruct the panel
structure of the data regardless of how the observation rows are organized.
The setobs command has options that parallel those in the graphical interface. If suitable index
variables are available you can do, for example

setobs unitvar timevar --panel-vars

where unitvar is a variable that indexes the units and timevar is a variable indexing the periods.
Alternatively you can use the form setobs freq 1:1 structure, where freq is replaced by the “block
size” of the data (that is, the number of periods in the case of stacked time series, or the number
of units in the case of stacked cross-sections) and structure is either --stacked-time-series or
--stacked-cross-section. Two examples are given below: the first is suitable for a panel in
the form of stacked time series with observations from 20 periods; the second for stacked cross
sections with 5 units.

setobs 20 1:1 --stacked-time-series

setobs 5 1:1 --stacked-cross-section

Panel data arranged by variable

Publicly available panel data sometimes come arranged “by variable.” Suppose we have data on two
variables, x1 and x2, for each of 50 states in each of 5 years (giving a total of 250 observations
per variable). One textual representation of such a data set would start with a block for x1, with
50 rows corresponding to the states and 5 columns corresponding to the years. This would be
followed, vertically, by a block with the same structure for variable x2. A fragment of such a data
file is shown below, with quinquennial observations 1965–1985. Imagine the table continued for
48 more states, followed by another 50 rows for variable x2.

x1
1965 1970 1975 1980 1985
AR 100.0 110.5 118.7 131.2 160.4
AZ 100.0 104.3 113.8 120.9 140.6

If a datafile with this sort of structure is read into gretl,3 the program will interpret the columns as
distinct variables, so the data will not be usable “as is.” But there is a mechanism for correcting the
situation, namely the stack function within the genr command.
Consider the first data column in the fragment above: the first 50 rows of this column constitute a
cross-section for the variable x1 in the year 1965. If we could create a new variable by stacking the
3 Note that you will have to modify such a datafile slightly before it can be read at all. The line containing the variable

name (in this example x1) will have to be removed, and so will the initial row containing the years, otherwise they will be
taken as numerical data.
Chapter 4. Data files 25

first 50 entries in the second column underneath the first 50 entries in the first, we would be on the
way to making a data set “by observation” (in the first of the two forms mentioned above, stacked
cross-sections). That is, we’d have a column comprising a cross-section for x1 in 1965, followed by
a cross-section for the same variable in 1970.
The following gretl script illustrates how we can accomplish the stacking, for both x1 and x2. We
assume that the original data file is called panel.txt, and that in this file the columns are headed
with “variable names” p1, p2, . . . , p5. (The columns are not really variables, but in the first instance
we “pretend” that they are.)

open panel.txt
genr x1 = stack(p1..p5) --length=50
genr x2 = stack(p1..p5) --offset=50 --length=50
setobs 50 1:1 --stacked-cross-section
store panel.gdt x1 x2

The second line illustrates the syntax of the stack function. The double dots within the parenthe-
ses indicate a range of variables to be stacked: here we want to stack all 5 columns (for all 5 years).4
The full data set contains 100 rows; in the stacking of variable x1 we wish to read only the first 50
rows from each column: we achieve this by adding --length=50. Note that if you want to stack a
non-contiguous set of columns you can give a comma-separated list of variable names, as in

genr x = stack(p1,p3,p5)

or you can provide within the parentheses the name of a previously created list (see chapter 12).
On line 3 we do the stacking for variable x2. Again we want a length of 50 for the components of
the stacked series, but this time we want gretl to start reading from the 50th row of the original
data, and we specify --offset=50. Line 4 imposes a panel interpretation on the data; finally, we
save the data in gretl format, with the panel interpretation, discarding the original “variables” p1
through p5.
The illustrative script above is appropriate when the number of variable to be processed is small.
When then are many variables in the data set it will be more efficient to use a command loop to
accomplish the stacking, as shown in the following script. The setup is presumed to be the same
as in the previous section (50 units, 5 periods), but with 20 variables rather than 2.

open panel.txt
loop i=1..20
genr k = ($i - 1) * 50
genr x$i = stack(p1..p5) --offset=k --length=50
endloop
setobs 50 1.01 --stacked-cross-section
store panel.gdt x1 x2 x3 x4 x5 x6 x7 x8 x9 x10 \
x11 x12 x13 x14 x15 x16 x17 x18 x19 x20

Panel data marker strings

It can be helpful with panel data to have the observations identified by mnemonic markers. A
special function in the genr command is available for this purpose.
In the example above, suppose all the states are identified by two-letter codes in the left-most
column of the original datafile. When the stacking operation is performed, these codes will be
stacked along with the data values. If the first row is marked AR for Arkansas, then the marker AR
will end up being shown on each row containing an observation for Arkansas. That’s all very well,
but these markers don’t tell us anything about the date of the observation. To rectify this we could
do:
4 You can also specify a list of series using the wildcard ‘*’; for example stack(p*) would stack all series whose names

begin with ‘p’.

Chapter 4. Data files 26

genr time
genr year = 1960 + (5 * time)
genr markers = "%s:%d", marker, year

The first line generates a 1-based index representing the period of each observation, and the second
line uses the time variable to generate a variable representing the year of the observation. The
third line contains this special feature: if (and only if) the name of the new “variable” to generate
is markers, the portion of the command following the equals sign is taken as C-style format string
(which must be wrapped in double quotes), followed by a comma-separated list of arguments.
The arguments will be printed according to the given format to create a new set of observation
markers. Valid arguments are either the names of variables in the dataset, or the string marker
which denotes the pre-existing observation marker. The format specifiers which are likely to be
useful in this context are %s for a string and %d for an integer. Strings can be truncated: for
example %.3s will use just the first three characters of the string. To chop initial characters off
an existing observation marker when constructing a new one, you can use the syntax marker + n,
where n is a positive integer: in the case the first n characters will be skipped.
After the commands above are processed, then, the observation markers will look like, for example,
AR:1965, where the two-letter state code and the year of the observation are spliced together with
a colon.

Panel dummy variables

In a panel study you may wish to construct dummy variables of one or both of the following sorts:
(a) dummies as unique identifiers for the units or groups, and (b) dummies as unique identifiers for
the time periods. The former may be used to allow the intercept of the regression to differ across
the units, the latter to allow the intercept to differ across periods.
Two special functions are available to create such dummies. These are found under the “Add”
menu in the GUI, or under the genr command in script mode or gretlcli.

1. “unit dummies” (script command genr unitdum). This command creates a set of dummy
variables identifying the cross-sectional units. The variable du_1 will have value 1 in each
row corresponding to a unit 1 observation, 0 otherwise; du_2 will have value 1 in each row
corresponding to a unit 2 observation, 0 otherwise; and so on.

2. “time dummies” (script command genr timedum). This command creates a set of dummy
variables identifying the periods. The variable dt_1 will have value 1 in each row correspond-
ing to a period 1 observation, 0 otherwise; dt_2 will have value 1 in each row corresponding
to a period 2 observation, 0 otherwise; and so on.

If a panel data set has the YEAR of the observation entered as one of the variables you can create a
periodic dummy to pick out a particular year, e.g. genr dum = (YEAR=1960). You can also create
periodic dummy variables using the modulus operator, %. For instance, to create a dummy with
value 1 for the first observation and every thirtieth observation thereafter, 0 otherwise, do

genr index
genr dum = ((index-1) % 30) = 0

Lags, differences, trends

If the time periods are evenly spaced you may want to use lagged values of variables in a panel
regression (but see also chapter 17); you may also wish to construct first differences of variables of
interest.
Once a dataset is identified as a panel, gretl will handle the generation of such variables correctly.
For example the command genr x1_1 = x1(-1) will create a variable that contains the first lag
Chapter 4. Data files 27

of x1 where available, and the missing value code where the lag is not available (e.g. at the start of
the time series for each group). When you run a regression using such variables, the program will
automatically skip the missing observations.
When a panel data set has a fairly substantial time dimension, you may wish to include a trend in
the analysis. The command genr time creates a variable named time which runs from 1 to T for
each unit, where T is the length of the time-series dimension of the panel. If you want to create an
index that runs consecutively from 1 to m × T , where m is the number of units in the panel, use
genr index.

Basic statistics by unit

Gretl contains functions which can be used to generate basic descriptive statistics for a given vari-
able, on a per-unit basis; these are pnobs() (number of valid cases), pmin() and pmax() (minimum
and maximum) and pmean() and psd() (mean and standard deviation).
As a brief illustration, suppose we have a panel data set comprising 8 time-series observations on
each of N units or groups. Then the command

genr pmx = pmean(x)

creates a series of this form: the first 8 values (corresponding to unit 1) contain the mean of x for
unit 1, the next 8 values contain the mean for unit 2, and so on. The psd() function works in a
similar manner. The sample standard deviation for group i is computed as
sP
(x − x̄i )2
si =
Ti − 1

where Ti denotes the number of valid observations on x for the given unit, x̄i denotes the group
mean, and the summation is across valid observations for the group. If Ti < 2, however, the
standard deviation is recorded as 0.
One particular use of psd() may be worth noting. If you want to form a sub-sample of a panel that
contains only those units for which the variable x is time-varying, you can either use

smpl (pmin(x) < pmax(x)) --restrict

or

smpl (psd(x) > 0) --restrict

4.6 Missing data values

Representation and handling
Missing values are represented internally as DBL_MAX, the largest floating-point number that can be
represented on the system (which is likely to be at least 10 to the power 300, and so should not
be confused with legitimate data values). In a native-format data file they should be represented
as NA. When importing CSV data gretl accepts several common representations of missing values
including −999, the string NA (in upper or lower case), a single dot, or simply a blank cell. Blank cells
should, of course, be properly delimited, e.g. 120.6,,5.38, in which the middle value is presumed
missing.
As for handling of missing values in the course of statistical analysis, gretl does the following:

• In calculating descriptive statistics (mean, standard deviation, etc.) under the summary com-
mand, missing values are simply skipped and the sample size adjusted appropriately.
Chapter 4. Data files 28

• In running regressions gretl first adjusts the beginning and end of the sample range, trun-
cating the sample if need be. Missing values at the beginning of the sample are common in
time series work due to the inclusion of lags, first differences and so on; missing values at the
end of the range are not uncommon due to differential updating of series and possibly the
inclusion of leads.

If gretl detects any missing values “inside” the (possibly truncated) sample range for a regression,
the result depends on the character of the dataset and the estimator chosen. In many cases, the
program will automatically skip the missing observations when calculating the regression results.
In this situation a message is printed stating how many observations were dropped. On the other
hand, the skipping of missing observations is not supported for all procedures: exceptions include
all autoregressive estimators, system estimators such as SUR, and nonlinear least squares. In the
case of panel data, the skipping of missing observations is supported only if their omission leaves
a balanced panel. If missing observations are found in cases where they are not supported, gretl
gives an error message and refuses to produce estimates.

Manipulating missing values

Some special functions are available for the handling of missing values. The boolean function
missing() takes the name of a variable as its single argument; it returns a series with value 1 for
each observation at which the given variable has a missing value, and value 0 otherwise (that is, if
the given variable has a valid value at that observation). The function ok() is complementary to
missing; it is just a shorthand for !missing (where ! is the boolean NOT operator). For example,
one can count the missing values for variable x using

scalar nmiss_x = sum(missing(x))

The function zeromiss(), which again takes a single series as its argument, returns a series where
all zero values are set to the missing code. This should be used with caution — one does not want
to confuse missing values and zeros — but it can be useful in some contexts. For example, one can
determine the first valid observation for a variable x using

genr time
scalar x0 = min(zeromiss(time * ok(x)))

The function misszero() does the opposite of zeromiss, that is, it converts all missing values to
zero.
It may be worth commenting on the propagation of missing values within genr formulae. The
general rule is that in arithmetical operations involving two variables, if either of the variables has
a missing value at observation t then the resulting series will also have a missing value at t. The
one exception to this rule is multiplication by zero: zero times a missing value produces zero (since
this is mathematically valid regardless of the unknown value).

4.7 Maximum size of data sets

Basically, the size of data sets (both the number of variables and the number of observations per
variable) is limited only by the characteristics of your computer. Gretl allocates memory dynami-
cally, and will ask the operating system for as much memory as your data require. Obviously, then,
you are ultimately limited by the size of RAM.
Aside from the multiple-precision OLS option, gretl uses double-precision floating-point numbers
throughout. The size of such numbers in bytes depends on the computer platform, but is typically
eight. To give a rough notion of magnitudes, suppose we have a data set with 10,000 observations
on 500 variables. That’s 5 million floating-point numbers or 40 million bytes. If we define the
Chapter 4. Data files 29

megabyte (MB) as 1024 × 1024 bytes, as is standard in talking about RAM, it’s slightly over 38 MB.
The program needs additional memory for workspace, but even so, handling a data set of this size
should be quite feasible on a current PC, which at the time of writing is likely to have at least 256
MB of RAM.
If RAM is not an issue, there is one further limitation on data size (though it’s very unlikely to
be a binding constraint). That is, variables and observations are indexed by signed integers, and
on a typical PC these will be 32-bit values, capable of representing a maximum positive value of
231 − 1 = 2, 147, 483, 647.
The limits mentioned above apply to gretl’s “native” functionality. There are tighter limits with
regard to two third-party programs that are available as add-ons to gretl for certain sorts of time-
series analysis including seasonal adjustment, namely TRAMO/SEATS and X-12-ARIMA. These pro-
grams employ a fixed-size memory allocation, and can’t handle series of more than 600 observa-
tions.

4.8 Data file collections

If you’re using gretl in a teaching context you may be interested in adding a collection of data files
and/or scripts that relate specifically to your course, in such a way that students can browse and
access them easily.
There are three ways to access such collections of files:

• For data files: select the menu item “File, Open data, Sample file”, or click on the folder icon
on the gretl toolbar.

• For script files: select the menu item “File, Script files, Practice file”.

When a user selects one of the items:

• The data or script files included in the gretl distribution are automatically shown (this includes
files relating to Ramanathan’s Introductory Econometrics and Greene’s Econometric Analysis).

• The program looks for certain known collections of data files available as optional extras,
for instance the datafiles from various econometrics textbooks (Davidson and MacKinnon,
Gujarati, Stock and Watson, Verbeek, Wooldridge) and the Penn World Table (PWT 5.6). (See
the data page at the gretl website for information on these collections.) If the additional files
are found, they are added to the selection windows.

• The program then searches for valid file collections (not necessarily known in advance) in
these places: the “system” data directory, the system script directory, the user directory,
and all first-level subdirectories of these. For reference, typical values for these directories
are shown in Table 4.1. (Note that PERSONAL is a placeholder that is expanded by Windows,
corresponding to “My Documents” on English-language systems.)

Linux MS Windows
system data dir /usr/share/gretl/data c:\Program Files\gretl\data
system script dir /usr/share/gretl/scripts c:\Program Files\gretl\scripts
user dir $HOME/gretl PERSONAL\gretl

Table 4.1: Typical locations for file collections

Any valid collections will be added to the selection windows. So what constitutes a valid file collec-
tion? This comprises either a set of data files in gretl XML format (with the .gdt suffix) or a set of
Chapter 4. Data files 30

script files containing gretl commands (with .inp suffix), in each case accompanied by a “master
file” or catalog. The gretl distribution contains several example catalog files, for instance the file
descriptions in the misc sub-directory of the gretl data directory and ps_descriptions in the
misc sub-directory of the scripts directory.
If you are adding your own collection, data catalogs should be named descriptions and script
catalogs should be be named ps_descriptions. In each case the catalog should be placed (along
with the associated data or script files) in its own specific sub-directory (e.g. /usr/share/gretl/
data/mydata or c:\userdata\gretl\data\mydata).
The catalog files are plain text; if they contain non-ASCII characters they must be encoded as UTF-
8. The syntax of such files is straightforward. Here, for example, are the first few lines of gretl’s
“misc” data catalog:

# Gretl: various illustrative datafiles

"arma","artificial data for ARMA script example"
"ects_nls","Nonlinear least squares example"
"hamilton","Prices and exchange rate, U.S. and Italy"

The first line, which must start with a hash mark, contains a short name, here “Gretl”, which
will appear as the label for this collection’s tab in the data browser window, followed by a colon,
followed by an optional short description of the collection.
Subsequent lines contain two elements, separated by a comma and wrapped in double quotation
marks. The first is a datafile name (leave off the .gdt suffix here) and the second is a short de-
scription of the content of that datafile. There should be one such line for each datafile in the
collection.
A script catalog file looks very similar, except that there are three fields in the file lines: a filename
(without its .inp suffix), a brief description of the econometric point illustrated in the script, and
a brief indication of the nature of the data used. Again, here are the first few lines of the supplied
“misc” script catalog:

# Gretl: various sample scripts

"arma","ARMA modeling","artificial data"
"ects_nls","Nonlinear least squares (Davidson)","artificial data"
"leverage","Influential observations","artificial data"
"longley","Multicollinearity","US employment"

If you want to make your own data collection available to users, these are the steps:

1. Assemble the data, in whatever format is convenient.

2. Convert the data to gretl format and save as gdt files. It is probably easiest to convert the data
by importing them into the program from plain text, CSV, or a spreadsheet format (MS Excel
or Gnumeric) then saving them. You may wish to add descriptions of the individual variables
(the “Variable, Edit attributes” menu item), and add information on the source of the data (the
“Data, Edit info” menu item).

3. Write a descriptions file for the collection using a text editor.

4. Put the datafiles plus the descriptions file in a subdirectory of the gretl data directory (or user
directory).

5. If the collection is to be distributed to other people, package the data files and catalog in some
suitable manner, e.g. as a zipfile.

If you assemble such a collection, and the data are not proprietary, we would encourage you to
submit the collection for packaging as a gretl optional extra.
 Chapter 5

Special functions in genr

5.1 Introduction
The genr command provides a flexible means of defining new variables. It is documented in the
Gretl Command Reference. This chapter offers a more expansive discussion of some of the special
functions available via genr and some of the finer points of the command.

5.2 Long-run variance

As is well known, the variance of the average of T random variables x1 , x2 , . . . , xT with equal vari-
ance σ 2 equals σ 2 /T if the data are uncorrelated. In this case, the sample variance of xt over the
sample size provides a consistent estimator.
PT
If, however, there is serial correlation among the xt s, the variance of X̄ = T −1 t=1 xt must be
estimated differently. One of the most widely used statistics for this purpose is a nonparametric
kernel estimator with the Bartlett kernel defined as
 
TX
−k k
X
2 −1
ω̂ (k) = T  wi (xt − X̄)(xt−i − X̄) , (5.1)
t=k i=−k

where the integer k is known as the window size and the wi terms are the so-called Bartlett weights,
|i|
defined as wi = 1 − k+1 . It can be shown that, for k large enough, ω̂2 (k)/T yields a consistent
estimator of the variance of X̄.
Gretl implements this estimator by means of the function lrvar(), which takes two arguments:
the series whose long-run variance must be estimated and the scalar k. If k is negative, the popular
choice T 1/3 is used.

5.3 Cumulative densities and p-values

The two functions cdf and pvalue provide complementary means of examining values from several
probability distributions: the standard normal, Student’s t, χ 2 , F , gamma, and binomial. The syntax
of these functions is set out in the Gretl Command Reference; here we expand on some subtleties.
The cumulative density function or CDF for a random variable is the integral of the variable’s
density from its lower limit (typically either −∞ or 0) to any specified value x. The p-value (at
least the one-tailed, right-hand p-value as returned by the pvalue function) is the complementary
probability, the integral from x to the upper limit of the distribution, typically +∞.
In principle, therefore, there is no need for two distinct functions: given a CDF value p0 you could
easily find the corresponding p-value as 1 − p0 (or vice versa). In practice, with finite-precision
computer arithmetic, the two functions are not redundant. This requires a little explanation. In
gretl, as in most statistical programs, floating point numbers are represented as “doubles” —
double-precision values that typically have a storage size of eight bytes or 64 bits. Since there are
only so many bits available, only so many floating-point numbers can be represented: doubles do
not model the real line. Typically doubles can represent numbers over the range (roughly) ±1.7977×
10308 , but only to about 15 digits of precision.

31
Chapter 5. Special functions in genr 32

Suppose you’re interested in the left tail of the χ 2 distribution with 50 degrees of freedom: you’d
like to know the CDF value for x = 0.9. Take a look at the following interactive session:

? genr p1 = cdf(X, 50, 0.9)

Generated scalar p1 (ID 2) = 8.94977e-35
? genr p2 = pvalue(X, 50, 0.9)
Generated scalar p2 (ID 3) = 1
? genr test = 1 - p2
Generated scalar test (ID 4) = 0

The cdf function has produced an accurate value, but the pvalue function gives an answer of 1,
from which it is not possible to retrieve the answer to the CDF question. This may seem surprising
at first, but consider: if the value of p1 above is correct, then the correct value for p2 is 1−8.94977×
10−35 . But there’s no way that value can be represented as a double: that would require over 30
digits of precision.
Of course this is an extreme example. If the x in question is not too far off into one or other tail
of the distribution, the cdf and pvalue functions will in fact produce complementary answers, as
shown below:

? genr p1 = cdf(X, 50, 30)

Generated scalar p1 (ID 2) = 0.0111648
? genr p2 = pvalue(X, 50, 30)
Generated scalar p2 (ID 3) = 0.988835
? genr test = 1 - p2
Generated scalar test (ID 4) = 0.0111648

But the moral is that if you want to examine extreme values you should be careful in selecting the
function you need, in the knowledge that values very close to zero can be represented as doubles
while values very close to 1 cannot.

5.4 Retrieving internal variables

The genr command provides a means of retrieving various values calculated by the program in
the course of estimating models or testing hypotheses. The variables that can be retrieved in this
way are listed in the Gretl Command Reference; here we say a bit more about the special variables
$test and $pvalue.
These variables hold, respectively, the value of the last test statistic calculated using an explicit
testing command and the p-value for that test statistic. If no such test has been performed at the
time when these variables are referenced, they will produce the missing value code. The “explicit
testing commands” that work in this way are as follows: add (joint test for the significance of vari-
ables added to a model); adf (Augmented Dickey–Fuller test, see below); arch (test for ARCH); chow
(Chow test for a structural break); coeffsum (test for the sum of specified coefficients); cusum (the
Harvey–Collier t-statistic); kpss (KPSS stationarity test, no p-value available); lmtest (see below);
meantest (test for difference of means); omit (joint test for the significance of variables omitted
from a model); reset (Ramsey’s RESET); restrict (general linear restriction); runs (runs test for
randomness); testuhat (test for normality of residual); and vartest (test for difference of vari-
ances). In most cases both a $test and a $pvalue are stored; the exception is the KPSS test, for
which a p-value is not currently available.
An important point to notice about this mechanism is that the internal variables $test and $pvalue
are over-written each time one of the tests listed above is performed. If you want to reference these
values, you must do so at the correct point in the sequence of gretl commands.
A related point is that some of the test commands generate, by default, more than one test statistic
and p-value; in these cases only the last values are stored. To get proper control over the retrieval
of values via $test and $pvalue you should formulate the test command in such a way that the
result is unambiguous. This comment applies in particular to the adf and lmtest commands.
Chapter 5. Special functions in genr 33

• By default, the adf command generates three variants of the Dickey–Fuller test: one based
on a regression including a constant, one using a constant and linear trend, and one using a
constant and a quadratic trend. When you wish to reference $test or $pvalue in connection
with this command, you can control the variant that is recorded by using one of the flags
--nc, --c, --ct or --ctt with adf.

• By default, the lmtest command (which must follow an OLS regression) performs several
diagnostic tests on the regression in question. To control what is recorded in $test and
$pvalue you should limit the test using one of the flags --logs, --autocorr, --squares or
--white.

As an aid in working with values retrieved using $test and $pvalue, the nature of the test to which
these values relate is written into the descriptive label for the generated variable. You can read the
label for the variable using the label command (with just one argument, the name of the variable),
to check that you have retrieved the right value. The following interactive session illustrates this
point.

? adf 4 x1 --c
Augmented Dickey-Fuller tests, order 4, for x1
sample size 59
unit-root null hypothesis: a = 1
test with constant
model: (1 - L)y = b0 + (a-1)*y(-1) + ... + e
estimated value of (a - 1): -0.216889
test statistic: t = -1.83491
asymptotic p-value 0.3638
P-values based on MacKinnon (JAE, 1996)
? genr pv = $pvalue
Generated scalar pv (ID 13) = 0.363844
? label pv
pv=Dickey-Fuller pvalue (scalar)

5.5 The discrete Fourier transform

The discrete Fourier transform can be best thought of as a linear, invertible transform of a complex
vector. Hence, if x is an n-dimensional vector whose k-th element is xk = ak + ibk , then the output
of the discrete Fourier transform is a vector f = F (x) whose k-th element is
n−1
X
fk = e−iω(j,k) xj
j=0

jk
where ω(j, k) = 2π i n . Since the transformation is invertible, the vector x can be recovered from
f via the so-called inverse transform
n−1
1 X iω(j,k)
xk = e fj .
n j=0

The Fourier transform is used in many diverse situations on account of this key property: the
convolution of two vectors can be performed efficiently by multiplying the elements of their Fourier
transforms and inverting the result. If
n
X
zk = xj yk−j ,
j=1

then
F (z) = F (x)  F (y).
Chapter 5. Special functions in genr 34

That is, F (z)k = F (x)k F (y)k .

For computing the Fourier transform, gretl uses the external library fftw3: see Frigo and Johnson
(2005). This guarantees extreme speed and accuracy. In fact, the CPU time needed to perform
the transform is O(n log n) for any n. This is why the array of numerical techniques employed in
fftw3 is commonly known as the Fast Fourier Transform.
Gretl provides two matrix functions1 for performing the Fourier transform and its inverse: fft and
ffti. In fact, gretl’s implementation of the Fourier transform is somewhat more specialized: the
input to the fft function is understood to be real. Conversely, ffti takes a complex argument and
delivers a real result. For example:

x1 = { 1 ; 2 ; 3 }
# perform the transform
f = fft(a)
# perform the inverse transform
x2 = ffti(f)

yields      
1 6 0 1
     
 2 
x1 =  f =
 −1.5 0.866   2 
x2 = 
 

3 −1.5 −0.866 3
where the first column of f holds the real part and the second holds the complex part. In general,
if the input to fft has n columns, the output has 2n columns, where the real parts are stored in
the odd columns and the complex parts in the even ones. Should it be necessary to compute the
Fourier transform on several vectors with the same number of elements, it is numerically more
efficient to group them into a matrix rather than invoking fft for each vector separately.
As an example, consider the multiplication of two polynomials:

a(x) = 1 + 0.5x
b(x) = 1 + 0.3x − 0.8x 2
c(x) = a(x) · b(x) = 1 + 0.8x − 0.65x 2 − 0.4x 3

The coefficients of the polynomial c(x) are the convolution of the coefficients of a(x) and b(x);
the following gretl code fragment illustrates how to compute the coefficients of c(x):

# define the two polynomials

a = { 1, 0.5, 0, 0 }’
b = { 1, 0.3, -0.8, 0 }’
# perform the transforms
fa = fft(a)
fb = fft(b)
# complex-multiply the two transforms
fc = cmult(fa, fb)
# compute the coefficients of c via the inverse transform
c = ffti(fc)

Maximum efficiency would have been achieved by grouping a and b into a matrix. The computa-
tional advantage is so little in this case that the exercise is a bit silly, but the following alternative
may be preferable for a large number of rows/columns:

# define the two polynomials

a = { 1 ; 0.5; 0 ; 0 }
b = { 1 ; 0.3 ; -0.8 ; 0 }
1 See chapter 13.
Chapter 5. Special functions in genr 35

# perform the transforms jointly

f = fft(a ~ b)
# complex-multiply the two transforms
fc = cmult(f[,1:2], f[,3:4])
# compute the coefficients of c via the inverse transform
c = ffti(fc)

Traditionally, the Fourier transform in econometrics has been mostly used in time-series analysis,
the periodogram being the best known example. Example script 5.1 shows how to compute the
periodogram of a time series via the fft function.

Example 5.1: Periodogram via the Fourier transform

nulldata 50
# generate an AR(1) process
series e = normal()
series x = 0
x = 0.9*x(-1) + e
# compute the periodogram
scale = 2*pi*$nobs
X = { x }
F = fft(X)
S = sumr(F.^2)
S = S[2:($nobs/2)+1]/scale
omega = seq(1,($nobs/2))’ .* (2*pi/$nobs)
omega = omega ~ S
# compare the built-in command
pergm x
print omega
 Chapter 6

Sub-sampling a dataset

6.1 Introduction
Some subtle issues can arise here. This chapter attempts to explain the issues.
A sub-sample may be defined in relation to a full data set in two different ways: we will refer to these
as “setting” the sample and “restricting” the sample; these methods are discussed in sections 6.2
and 6.3 respectively. In addition section 6.4 discusses resampling with replacement, which is useful
in the context of bootstrapping test statistics.
The following discussion focuses on the command-line approach. But you can also invoke the
methods outlined here via the items under the Sample menu in the GUI program.

6.2 Setting the sample

By “setting” the sample we mean defining a sub-sample simply by means of adjusting the starting
and/or ending point of the current sample range. This is likely to be most relevant for time-series
data. For example, one has quarterly data from 1960:1 to 2003:4, and one wants to run a regression
using only data from the 1970s. A suitable command is then

smpl 1970:1 1979:4

Or one wishes to set aside a block of observations at the end of the data period for out-of-sample
forecasting. In that case one might do

smpl ; 2000:4

where the semicolon is shorthand for “leave the starting observation unchanged”. (The semicolon
may also be used in place of the second parameter, to mean that the ending observation should be
unchanged.) By “unchanged” here, we mean unchanged relative to the last smpl setting, or relative
to the full dataset if no sub-sample has been defined up to this point. For example, after

smpl 1970:1 2003:4

smpl ; 2000:4

the sample range will be 1970:1 to 2000:4.

An incremental or relative form of setting the sample range is also supported. In this case a relative
offset should be given, in the form of a signed integer (or a semicolon to indicate no change), for
both the starting and ending point. For example

smpl +1 ;

will advance the starting observation by one while preserving the ending observation, and

smpl +2 -1

36
Chapter 6. Sub-sampling a dataset 37

will both advance the starting observation by two and retard the ending observation by one.
An important feature of “setting” the sample as described above is that it necessarily results in
the selection of a subset of observations that are contiguous in the full dataset. The structure of
the dataset is therefore unaffected (for example, if it is a quarterly time series before setting the
sample, it remains a quarterly time series afterwards).

6.3 Restricting the sample

By “restricting” the sample we mean selecting observations on the basis of some Boolean (logical)
criterion, or by means of a random number generator. This is likely to be most relevant for cross-
sectional or panel data.
Suppose we have data on a cross-section of individuals, recording their gender, income and other
characteristics. We wish to select for analysis only the women. If we have a gender dummy variable
with value 1 for men and 0 for women we could do

smpl gender=0 --restrict

to this effect. Or suppose we want to restrict the sample to respondents with incomes over $50,000.
Then we could use

smpl income>50000 --restrict

A question arises here. If we issue the two commands above in sequence, what do we end up with
in our sub-sample: all cases with income over 50000, or just women with income over 50000? By
default, in a gretl script, the answer is the latter: women with income over 50000. The second
restriction augments the first, or in other words the final restriction is the logical product of the
new restriction and any restriction that is already in place. If you want a new restriction to replace
any existing restrictions you can first recreate the full dataset using

smpl --full

Alternatively, you can add the replace option to the smpl command:

smpl income>50000 --restrict --replace

This option has the effect of automatically re-establishing the full dataset before applying the new
restriction.
Unlike a simple “setting” of the sample, “restricting” the sample may result in selection of non-
contiguous observations from the full data set. It may also change the structure of the data set.
This can be seen in the case of panel data. Say we have a panel of five firms (indexed by the variable
firm) observed in each of several years (identified by the variable year). Then the restriction

smpl year=1995 --restrict

produces a dataset that is not a panel, but a cross-section for the year 1995. Similarly

smpl firm=3 --restrict

produces a time-series dataset for firm number 3.

For these reasons (possible non-contiguity in the observations, possible change in the structure of
the data), gretl acts differently when you “restrict” the sample as opposed to simply “setting” it. In
the case of setting, the program merely records the starting and ending observations and uses these
Chapter 6. Sub-sampling a dataset 38

as parameters to the various commands calling for the estimation of models, the computation of
statistics, and so on. In the case of restriction, the program makes a reduced copy of the dataset
and by default treats this reduced copy as a simple, undated cross-section.1
If you wish to re-impose a time-series or panel interpretation of the reduced dataset you can do so
using the setobs command, or the GUI menu item “Data, Dataset structure”.
The fact that “restricting” the sample results in the creation of a reduced copy of the original
dataset may raise an issue when the dataset is very large (say, several thousands of observations).
With such a dataset in memory, the creation of a copy may lead to a situation where the computer
runs low on memory for calculating regression results. You can work around this as follows:

1. Open the full data set, and impose the sample restriction.

2. Save a copy of the reduced data set to disk.

3. Close the full dataset and open the reduced one.

4. Proceed with your analysis.

Random sub-sampling
Besides restricting the sample on some deterministic criterion, it may sometimes be useful (when
working with very large datasets, or perhaps to study the properties of an estimator) to draw a
random sub-sample from the full dataset. This can be done using, for example,

smpl 100 --random

to select 100 cases. If you want the sample to be reproducible, you should set the seed for the
random number generator first, using set. This sort of sampling falls under the “restriction”
category: a reduced copy of the dataset is made.

6.4 Resampling and bootstrapping

Given an original data series x, the command

series xr = resample(x)

creates a new series each of whose elements is drawn at random from the elements of x. If the
original series has 100 observations, each element of x is selected with probability 1/100 at each
drawing. Thus the effect is to “shuffle” the elements of x, with the twist that each element of x may
appear more than once, or not at all, in xr.
The primary use of this function is in the construction of bootstrap confidence intervals or p-values.
Here is a simple example. Suppose we estimate a simple regression of y on x via OLS and find that
the slope coefficient has a reported t-ratio of 2.5 with 40 degrees of freedom. The two-tailed p-
value for the null hypothesis that the slope parameter equals zero is then 0.0166, using the t(40)
distribution. Depending on the context, however, we may doubt whether the ratio of coefficient to
standard error truly follows the t(40) distribution. In that case we could derive a bootstrap p-value
as shown in Example 6.1.
Under the null hypothesis that the slope with respect to x is zero, y is simply equal to its mean plus
an error term. We simulate y by resampling the residuals from the initial OLS and re-estimate the
model. We repeat this procedure a large number of times, and record the number of cases where
the absolute value of the t-ratio is greater than 2.5: the proportion of such cases is our bootstrap
p-value. For a good discussion of simulation-based tests and bootstrapping, see Davidson and
MacKinnon (2004, chapter 4).
1 With one exception: if you start with a balanced panel dataset and the restriction is such that it preserves a balanced
Chapter 6. Sub-sampling a dataset 39

Example 6.1: Calculation of bootstrap p-value

ols y 0 x
# save the residuals
genr ui = $uhat
scalar ybar = mean(y)
# number of replications for bootstrap
scalar replics = 10000
scalar tcount = 0
series ysim = 0
loop replics --quiet
# generate simulated y by resampling
ysim = ybar + resample(ui)
ols ysim 0 x
scalar tsim = abs($coeff(x) / $stderr(x))
tcount += (tsim > 2.5)
endloop
printf "proportion of cases with |t| > 2.5 = %g\n", tcount / replics

panel — for example, it results in the deletion of all the observations for one cross-sectional unit — then the reduced
dataset is still, by default, treated as a panel.
 Chapter 7

Graphs and plots

7.1 Gnuplot graphs

A separate program, gnuplot, is called to generate graphs. Gnuplot is a very full-featured graphing
program with myriad options. It is available from www.gnuplot.info (but note that a suitable copy
of gnuplot is bundled with the packaged versions of gretl for MS Windows and Mac OS X). gretl
gives you direct access, via a graphical interface, to a subset of gnuplot’s options and it tries to
choose sensible values for you; it also allows you to take complete control over graph details if you
wish.
With a graph displayed, you can click on the graph window for a pop-up menu with the following
options.

• Save as PNG: Save the graph in Portable Network Graphics format (the same format that you
see on screen).

• Save as postscript: Save in encapsulated postscript (EPS) format.

• Save as Windows metafile: Save in Enhanced Metafile (EMF) format.

• Save to session as icon: The graph will appear in iconic form when you select “Icon view” from
the View menu.

• Zoom: Lets you select an area within the graph for closer inspection (not available for all
graphs).

• Print: (Current GTK or MS Windows only) lets you print the graph directly.

• Copy to clipboard: MS Windows only, lets you paste the graph into Windows applications such
as MS Word.

• Edit: Opens a controller for the plot which lets you adjust many aspects of its appearance.

• Close: Closes the graph window.

Displaying data labels

For simple X-Y scatter plots, some further options are available if the dataset includes “case mark-
ers” (that is, labels identifying each observation).1 With a scatter plot displayed, when you move
the mouse pointer over a data point its label is shown on the graph. By default these labels are
transient: they do not appear in the printed or copied version of the graph. They can be removed by
selecting “Clear data labels” from the graph pop-up menu. If you want the labels to be affixed per-
manently (so they will show up when the graph is printed or copied), select the option “Freeze data
labels” from the pop-up menu; “Clear data labels” cancels this operation. The other label-related
option, “All data labels”, requests that case markers be shown for all observations. At present the
display of case markers is disabled for graphs containing more than 250 data points.
1 For an example of such a dataset, see the Ramanathan file data4-10: this contains data on private school enrollment

for the 50 states of the USA plus Washington, DC; the case markers are the two-letter codes for the states.

40
Chapter 7. Graphs and plots 41

GUI plot editor

Selecting the Edit option in the graph popup menu opens an editing dialog box, shown in Figure 7.1.
Notice that there are several tabs, allowing you to adjust many aspects of a graph’s appearance:
font, title, axis scaling, line colors and types, and so on. You can also add lines or descriptive labels
to a graph (under the Lines and Labels tabs). The “Apply” button applies your changes without
closing the editor; “OK” applies the changes and closes the dialog.

Figure 7.1: gretl’s gnuplot controller

Publication-quality graphics: advanced options

The GUI plot editor has two limitations. First, it cannot represent all the myriad options that
gnuplot offers. Users who are sufficiently familiar with gnuplot to know what they’re missing in
the plot editor presumably don’t need much help from gretl, so long as they can get hold of the
gnuplot command file that gretl has put together. Second, even if the plot editor meets your needs,
in terms of fine-tuning the graph you see on screen, a few details may need further work in order
to get optimal results for publication.
Either way, the first step in advanced tweaking of a graph is to get access to the graph command
file.

• In the graph display window, right-click and choose “Save to session as icon”.

• If it’s not already open, open the icon view window — either via the menu item View/Icon
view, or by clicking the “session icon view” button on the main-window toolbar.

• Right-click on the icon representing the newly added graph and select “Edit plot commands”
from the pop-up menu.

• You get a window displaying the plot file (Figure 7.2).

Here are the basic things you can do in this window. Obviously, you can edit the file you just
opened. You can also send it for processing by gnuplot, by clicking the “Execute” (cogwheel) icon
in the toolbar. Or you can use the “Save as” button to save a copy for editing and processing as you
wish.
Chapter 7. Graphs and plots 42

Figure 7.2: Plot commands editor

Unless you’re a gnuplot expert, most likely you’ll only need to edit a couple of lines at the top of
the file, specifying a driver (plus options) and an output file. We offer here a brief summary of some
points that may be useful.
First, gnuplot’s output mode is set via the command set term followed by the name of a supported
driver (“terminal” in gnuplot parlance) plus various possible options. (The top line in the plot
commands window shows the set term line that gretl used to make a PNG file, commented out.)
The graphic formats that are most suitable for publication are PDF and EPS. These are supported
by the gnuplot term types pdf, pdfcairo and postscript (with the eps option). The pdfcairo
driver has the virtue that is behaves in a very similar manner to the PNG one, the output of which
you see on screen. This is provided by the version of gnuplot that is included in the gretl packages
for MS Windows and Mac OS X; if you’re on Linux it may or may be supported. If pdfcairo is not
available, the pdf terminal may be available; the postscript terminal is almost certainly available.
Besides selecting a term type, if you want to get gnuplot to write the actual output file you need
to append a set output line giving a filename. Here are a few examples of the first two lines you
might type in the window editing your plot commands. We’ll make these more “realistic” shortly.

set term pdfcairo

set output ’mygraph.pdf’

set term pdf

set output ’mygraph.pdf’

set term postscript eps

set output ’mygraph.eps’

There are a couple of things worth remarking here. First, you may want to adjust the size of the
graph, and second you may want to change the font. The default sizes produced by the above
drivers are 5 inches by 3 inches for pdfcairo and pdf, and 5 inches by 3.5 inches for postscript
eps. In each case you can change this by giving a size specification, which takes the form XX,YY
(examples below).
Chapter 7. Graphs and plots 43

You may ask, why bother changing the size in the gnuplot command file? After all, PDF and EPS are
both vector formats, so the graphs can be scaled at will. True, but a uniform scaling will also affect
the font size, which may end looking wrong. You can get optimal results by experimenting with
the font and size options to gnuplot’s set term command. Here are some examples (comments
follow below).

# pdfcairo, regular size, slightly amended

set term pdfcairo font "Sans,6" size 5in,3.5in
# or small size
set term pdfcairo font "Sans,5" size 3in,2in

# pdf, regular size, slightly amended

set term pdf font "Helvetica,8" size 5in,3.5in
# or small
set term pdf font "Helvetica,6" size 3in,2in

# postscript, regular
set term post eps solid font "Helvetica,16"
# or small
set term post eps solid font "Helvetica,12" size 3in,2in

On the first line we set a sans serif font for pdfcairo at a suitable size for a 5 × 3.5 inch plot
(which you may find looks better than the rather “letterboxy” default of 5 × 3). And on the second
we illustrate what you might do to get a smaller 3 × 2 inch plot. You can specify the plot size in
centimeters if you prefer, as in

set term pdfcairo font "Sans,6" size 6cm,4cm

We then repeat the exercise for the pdf terminal. Notice that here we’re specifying one of the 35
standard PostScript fonts, namely Helvetica. Unlike pdfcairo, the plain pdf driver is unlikely to
be able to find fonts other than these.
In the third pair of lines we illustrate options for the postscript driver (which, as you see, can
be abbreviated as post). Note that here we have added the option solid. Unlike most other
drivers, this one uses dashed lines unless you specify the solid option. Also note that we’ve
(apparently) specified a much larger font in this case. That’s because the eps option in effect tells
the postscript driver to work at half-size (among other things), so we need to double the font
size.
Table 7.1 summarizes the basics for the three drivers we have mentioned.

Terminal default size (inches) suggested font

pdfcairo 5×3 Sans,6

pdf 5×3 Helvetica,8
post eps 5 × 3.5 Helvetica,16

Table 7.1: Drivers for publication-quality graphics

To find out more about gnuplot visit www.gnuplot.info. This site has documentation for the current
version of the program in various formats.

Additional tips
To be written. Line widths, enhanced text. Show a “before and after” example.
Chapter 7. Graphs and plots 44

7.2 Boxplots
These plots (after Tukey and Chambers) display the distribution of a variable. The central box
encloses the middle 50 percent of the data, i.e. it is bounded by the first and third quartiles. The
“whiskers” extend to the minimum and maximum values. A line is drawn across the box at the
median and a “+” sign identifies the mean — see Figure 7.3.

0.25

0.2

0.15

Q3

mean
0.1
median

0.05 Q1

ENROLL

Figure 7.3: Sample boxplot

In the case of boxplots with confidence intervals, dotted lines show the limits of an approximate 90
percent confidence interval for the median. This is obtained by the bootstrap method, which can
take a while if the data series is very long.
After each variable specified in the boxplot command, a parenthesized boolean expression may
be added, to limit the sample for the variable in question. A space must be inserted between the
variable name or number and the expression. Suppose you have salary figures for men and women,
and you have a dummy variable GENDER with value 1 for men and 0 for women. In that case you
could draw comparative boxplots with the following line in the boxplots dialog:

salary (GENDER=1) salary (GENDER=0)

 Chapter 8

Discrete variables

When a variable can take only a finite, typically small, number of values, then the variable is said to
be discrete. Some gretl commands act in a slightly different way when applied to discrete variables;
moreover, gretl provides a few commands that only apply to discrete variables. Specifically, the
dummify and xtab commands (see below) are available only for discrete variables, while the freq
(frequency distribution) command produces different output for discrete variables.

8.1 Declaring variables as discrete

Gretl uses a simple heuristic to judge whether a given variable should be treated as discrete, but
you also have the option of explicitly marking a variable as discrete, in which case the heuristic
check is bypassed.
The heuristic is as follows: First, are all the values of the variable “reasonably round”, where this
is taken to mean that they are all integer multiples of 0.25? If this criterion is met, we then ask
whether the variable takes on a “fairly small” set of distinct values, where “fairly small” is defined
as less than or equal to 8. If both conditions are satisfied, the variable is automatically considered
discrete.
To mark a variable as discrete you have two options.

1. From the graphical interface, select “Variable, Edit Attributes” from the menu. A dialog box
will appear and, if the variable seems suitable, you will see a tick box labeled “Treat this
variable as discrete”. This dialog box can also be invoked via the context menu (right-click on
a variable) or by pressing the F2 key.

2. From the command-line interface, via the discrete command. The command takes one or
more arguments, which can be either variables or list of variables. For example:
list xlist = x1 x2 x3
discrete z1 xlist z2

This syntax makes it possible to declare as discrete many variables at once, which cannot
presently be done via the graphical interface. The switch --reverse reverses the declaration
of a variable as discrete, or in other words marks it as continuous. For example:
discrete foo
# now foo is discrete
discrete foo --reverse
# now foo is continuous

The command-line variant is more powerful, in that you can mark a variable as discrete even if it
does not seem to be suitable for this treatment.
Note that marking a variable as discrete does not affect its content. It is the user’s responsibility
to make sure that marking a variable as discrete is a sensible thing to do. Note that if you want
to recode a continuous variable into classes, you can use the genr command and its arithmetic
functions, as in the following example:

45
Chapter 8. Discrete variables 46

nulldata 100
# generate a variable with mean 2 and variance 1
genr x = normal() + 2
# split into 4 classes
genr z = (x>0) + (x>2) + (x>4)
# now declare z as discrete
discrete z

Once a variable is marked as discrete, this setting is remembered when you save the file.

8.2 Commands for discrete variables

The dummify command
The dummify command takes as argument a series x and creates dummy variables for each distinct
value present in x, which must have already been declared as discrete. Example:

open greene22_2
discrete Z5 # mark Z5 as discrete
dummify Z5

The effect of the above command is to generate 5 new dummy variables, labeled DZ5_1 through
DZ5_5, which correspond to the different values in Z5. Hence, the variable DZ5_4 is 1 if Z5 equals
4 and 0 otherwise. This functionality is also available through the graphical interface by selecting
the menu item “Add, Dummies for selected discrete variables”.
The dummify command can also be used with the following syntax:

list dlist = dummify(x)

This not only creates the dummy variables, but also a named list (see section 12.1) that can be used
afterwards. The following example computes summary statistics for the variable Y for each value
of Z5:

open greene22_2
discrete Z5 # mark Z5 as discrete
list foo = dummify(Z5)
loop foreach i foo
smpl $i --restrict --replace
summary Y
endloop
smpl --full

Since dummify generates a list, it can be used directly in commands that call for a list as input, such
as ols. For example:

open greene22_2
discrete Z5 # mark Z5 as discrete
ols Y 0 dummify(Z5)

The freq command

The freq command displays absolute and relative frequencies for a given variable. The way fre-
quencies are counted depends on whether the variable is continuous or discrete. This command is
also available via the graphical interface by selecting the “Variable, Frequency distribution” menu
entry.
Chapter 8. Discrete variables 47

For discrete variables, frequencies are counted for each distinct value that the variable takes. For
continuous variables, values are grouped into “bins” and then the frequencies are counted for each
bin. The number of bins, by default, is computed as a function of the number of valid observations
in the currently selected sample via the rule shown in Table 8.1. However, when the command is
invoked through the menu item “Variable, Frequency Plot”, this default can be overridden by the
user.

Observations Bins
8 ≤ n < 16 5
16 ≤ n < 50 7
√
50 ≤ n ≤ 850 d ne
n > 850 29

Table 8.1: Number of bins for various sample sizes

For example, the following code

open greene19_1
freq TUCE
discrete TUCE # mark TUCE as discrete
freq TUCE

yields

Read datafile /usr/local/share/gretl/data/greene/greene19_1.gdt

periodicity: 1, maxobs: 32,
observations range: 1-32

Listing 5 variables:
0) const 1) GPA 2) TUCE 3) PSI 4) GRADE

? freq TUCE

Frequency distribution for TUCE, obs 1-32

number of bins = 7, mean = 21.9375, sd = 3.90151

interval midpt frequency rel. cum.

< 13.417 12.000 1 3.12% 3.12% *

13.417 - 16.250 14.833 1 3.12% 6.25% *
16.250 - 19.083 17.667 6 18.75% 25.00% ******
19.083 - 21.917 20.500 6 18.75% 43.75% ******
21.917 - 24.750 23.333 9 28.12% 71.88% **********
24.750 - 27.583 26.167 7 21.88% 93.75% *******
>= 27.583 29.000 2 6.25% 100.00% **

Test for null hypothesis of normal distribution:

Chi-square(2) = 1.872 with p-value 0.39211
? discrete TUCE # mark TUCE as discrete
? freq TUCE

Frequency distribution for TUCE, obs 1-32

frequency rel. cum.

12 1 3.12% 3.12% *
14 1 3.12% 6.25% *
17 3 9.38% 15.62% ***
Chapter 8. Discrete variables 48

19 3 9.38% 25.00% ***

20 2 6.25% 31.25% **
21 4 12.50% 43.75% ****
22 2 6.25% 50.00% **
23 4 12.50% 62.50% ****
24 3 9.38% 71.88% ***
25 4 12.50% 84.38% ****
26 2 6.25% 90.62% **
27 1 3.12% 93.75% *
28 1 3.12% 96.88% *
29 1 3.12% 100.00% *

Test for null hypothesis of normal distribution:

Chi-square(2) = 1.872 with p-value 0.39211

As can be seen from the sample output, a Doornik-Hansen test for normality is computed auto-
matically. This test is suppressed for discrete variables where the number of distinct values is less
than 10.
This command accepts two options: --quiet, to avoid generation of the histogram when invoked
from the command line and --gamma, for replacing the normality test with Locke’s nonparametric
test, whose null hypothesis is that the data follow a Gamma distribution.
If the distinct values of a discrete variable need to be saved, the values() matrix construct can be
used (see chapter 13).

The xtab command

The xtab command cab be invoked in either of the following ways. First,

xtab ylist ; xlist

where ylist and xlist are lists of discrete variables. This produces cross-tabulations (two-way
frequencies) of each of the variables in ylist (by row) against each of the variables in xlist (by
column). Or second,

xtab xlist

In the second case a full set of cross-tabulations is generated; that is, each variable in xlist is tabu-
lated against each other variable in the list. In the graphical interface, this command is represented
by the “Cross Tabulation” item under the View menu, which is active if at least two variables are
selected.
Here is an example of use:

open greene22_2
discrete Z* # mark Z1-Z8 as discrete
xtab Z1 Z4 ; Z5 Z6

which produces

Cross-tabulation of Z1 (rows) against Z5 (columns)

[ 1][ 2][ 3][ 4][ 5] TOT.

[ 0] 20 91 75 93 36 315
[ 1] 28 73 54 97 34 286

TOTAL 48 164 129 190 70 601

Chapter 8. Discrete variables 49

Pearson chi-square test = 5.48233 (4 df, p-value = 0.241287)

Cross-tabulation of Z1 (rows) against Z6 (columns)

[ 9][ 12][ 14][ 16][ 17][ 18][ 20] TOT.

[ 0] 4 36 106 70 52 45 2 315
[ 1] 3 8 48 45 37 67 78 286

TOTAL 7 44 154 115 89 112 80 601

Pearson chi-square test = 123.177 (6 df, p-value = 3.50375e-24)

Cross-tabulation of Z4 (rows) against Z5 (columns)

[ 1][ 2][ 3][ 4][ 5] TOT.

[ 0] 17 60 35 45 14 171
[ 1] 31 104 94 145 56 430

TOTAL 48 164 129 190 70 601

Pearson chi-square test = 11.1615 (4 df, p-value = 0.0248074)

Cross-tabulation of Z4 (rows) against Z6 (columns)

[ 9][ 12][ 14][ 16][ 17][ 18][ 20] TOT.

[ 0] 1 8 39 47 30 32 14 171
[ 1] 6 36 115 68 59 80 66 430

TOTAL 7 44 154 115 89 112 80 601

Pearson chi-square test = 18.3426 (6 df, p-value = 0.0054306)

Pearson’s χ 2 test for independence is automatically displayed, provided that all cells have expected
frequencies under independence greater than 10−7 . However, a common rule of thumb states that
this statistic is valid only if the expected frequency is 5 or greater for at least 80 percent of the
cells. If this condition is not met a warning is printed.
Additionally, the --row or --column options can be given: in this case, the output displays row or
column percentages, respectively.
If you want to cut and paste the output of xtab to some other program, e.g. a spreadsheet, you
may want to use the --zeros option; this option causes cells with zero frequency to display the
number 0 instead of being empty.
 Chapter 9

Loop constructs

9.1 Introduction
The command loop opens a special mode in which gretl accepts a block of commands to be re-
peated zero or more times. This feature may be useful for, among other things, Monte Carlo
simulations, bootstrapping of test statistics and iterative estimation procedures. The general form
of a loop is:

loop control-expression [ --progressive | --verbose | --quiet ]

loop body
endloop

Five forms of control-expression are available, as explained in section 9.2.

Not all gretl commands are available within loops. The commands that are not presently accepted
in this context are shown in Table 9.1.

Table 9.1: Commands not usable in loops

corrgm cusum data eqnprint function hurst include leverage

nulldata open rmplot run setmiss setobs tabprint vif

By default, the genr command operates quietly in the context of a loop (without printing informa-
tion on the variable generated). To force the printing of feedback from genr you may specify the
--verbose option to loop. The --quiet option suppresses the usual printout of the number of
iterations performed, which may be desirable when loops are nested.
The --progressive option to loop modifies the behavior of the commands print and store,
and certain estimation commands, in a manner that may be useful with Monte Carlo analyses (see
Section 9.3).
The following sections explain the various forms of the loop control expression and provide some
examples of use of loops.

+ If you are carrying out a substantial Monte Carlo analysis with many thousands of repetitions, memory
capacity and processing time may be an issue. To minimize the use of computer resources, run your script
using the command-line program, gretlcli, with output redirected to a file.

9.2 Loop control variants

Count loop
The simplest form of loop control is a direct specification of the number of times the loop should
be repeated. We refer to this as a “count loop”. The number of repetitions may be a numerical
constant, as in loop 1000, or may be read from a scalar variable, as in loop replics.

50
Chapter 9. Loop constructs 51

In the case where the loop count is given by a variable, say replics, in concept replics is an
integer; if the value is not integral, it is converted to an integer by truncation. Note that replics is
evaluated only once, when the loop is initially compiled.

While loop
A second sort of control expression takes the form of the keyword while followed by a boolean
expression. For example,

loop while essdiff > .00001

Execution of the commands within the loop will continue so long as (a) the specified condition
evaluates as true and (b) the number of iterations does not exceed the value of the internal vari-
able loop_maxiter. By default this equals 250, but you can specify a different value via the set
command (see the Gretl Command Reference).

Index loop
A third form of loop control uses an index variable, for example i.1 In this case you specify starting
and ending values for the index, which is incremented by one each time round the loop. The syntax
looks like this: loop i=1..20.
The index variable may be a pre-existing scalar; if this is not the case, the variable is created
automatically and is destroyed on exit from the loop.
The index may be used within the loop body in either of two ways: you can access the integer value
of i (see Example 9.4) or you can use its string representation, $i (see Example 9.5).
The starting and ending values for the index can be given in numerical form, by reference to pre-
defined scalar variables, or as expressions that evaluate to scalars. In the latter two cases the
variables are evaluated once, at the start of the loop. In addition, with time series data you can give
the starting and ending values in the form of dates, as in loop i=1950:1..1999:4.
This form of loop control is intended to be quick and easy, and as such it is subject to certain
limitations. In particular, the index variable is always incremented by one at each iteration. If, for
example, you have

loop i=m..n

where m and n are scalar variables with values m > n at the time of execution, the index will not be
decremented; rather, the loop will simply be bypassed.
If you need more complex loop control, see the “for” form below.
The index loop is particularly useful in conjunction with the values() matrix function when some
operation must be carried out for each value of some discrete variable (see chapter 8). Consider
the following example:

open greene22_2
discrete Z8
v8 = values(Z8)
loop i=1..rows(v8)
scalar xi = v8[i]
smpl (Z8=xi) --restrict --replace
printf "mean(Y | Z8 = %g) = %8.5f, sd(Y | Z8 = %g) = %g\n", \
xi, mean(Y), xi, sd(Y)
endloop
1 It is common programming practice to use simple, one-character names for such variables. However, you may use any

name that is acceptable by gretl: up to 15 characters, starting with a letter, and containing nothing but letters, numerals
and the underscore character.
Chapter 9. Loop constructs 52

In this case, we evaluate the conditional mean and standard deviation of the variable Y for each
value of Z8.

Foreach loop
The fourth form of loop control also uses an index variable, in this case to index a specified list
of strings. The loop is executed once for each string in the list. This can be useful for performing
repetitive operations on a list of variables. Here is an example of the syntax:

loop foreach i peach pear plum

print "$i"
endloop

This loop will execute three times, printing out “peach”, “pear” and “plum” on the respective itera-
tions. The numerical value of the index starts at 1 and is incremented by 1 at each iteration.
If you wish to loop across a list of variables that are contiguous in the dataset, you can give the
names of the first and last variables in the list, separated by “..”, rather than having to type all
the names. For example, say we have 50 variables AK, AL, . . . , WY, containing income levels for the
states of the US. To run a regression of income on time for each of the states we could do:

genr time
loop foreach i AL..WY
ols $i const time
endloop

This loop variant can also be used for looping across the elements in a named list (see chapter 12).
For example:

list ylist = y1 y2 y3
loop foreach i ylist
ols $i const x1 x2
endloop

Note that if you use this idiom inside a function (see chapter 10), looping across a list that has been
supplied to the function as an argument, it is necessary to use the syntax listname.$i to reference
the list-member variables. In the context of the example above, this would mean replacing the third
line with

ols ylist.$i const x1 x2

For loop
The final form of loop control emulates the for statement in the C programming language. The
sytax is loop for, followed by three component expressions, separated by semicolons and sur-
rounded by parentheses. The three components are as follows:

1. Initialization: This is evaluated only once, at the start of the loop. Common example: setting
a scalar control variable to some starting value.

2. Continuation condition: this is evaluated at the top of each iteration (including the first). If
the expression evaluates as true (non-zero), iteration continues, otherwise it stops. Common
example: an inequality expressing a bound on a control variable.

3. Modifier: an expression which modifies the value of some variable. This is evaluated prior
to checking the continuation condition, on each iteration after the first. Common example: a
control variable is incremented or decremented.
Chapter 9. Loop constructs 53

Here’s a simple example:

loop for (r=0.01; r<.991; r+=.01)

In this example the variable r will take on the values 0.01, 0.02, . . . , 0.99 across the 99 iterations.
Note that due to the finite precision of floating point arithmetic on computers it may be necessary
to use a continuation condition such as the above, r<.991, rather than the more “natural” r<=.99.
(Using double-precision numbers on an x86 processor, at the point where you would expect r to
equal 0.99 it may in fact have value 0.990000000000001.)
Any or all of the three expressions governing a for loop may be omitted — the minimal form is
(;;). If the continuation test is omitted it is implicitly true, so you have an infinite loop unless you
arrange for some other way out, such as a break statement.
If the initialization expression in a for loop takes the common form of setting a scalar variable to
a given value, the string representation of that scalar’s value is made available within the loop via
the accessor $varname.

9.3 Progressive mode

If the --progressive option is given for a command loop, special behavior is invoked for certain
commands, namely, print, store and simple estimation commands. By “simple” here we mean
commands which (a) estimate a single equation (as opposed to a system of equations) and (b) do
so by means of a single command statement (as opposed to a block of statements, as with nls and
mle). The paradigm is ols; other possibilities include tsls, wls, logit and so on.
The special behavior is as follows.
Estimators: The results from each individual iteration of the estimator are not printed. Instead,
after the loop is completed you get a printout of (a) the mean value of each estimated coefficient
across all the repetitions, (b) the standard deviation of those coefficient estimates, (c) the mean
value of the estimated standard error for each coefficient, and (d) the standard deviation of the
estimated standard errors. This makes sense only if there is some random input at each step.
print: When this command is used to print the value of a variable, you do not get a print each time
round the loop. Instead, when the loop is terminated you get a printout of the mean and standard
deviation of the variable, across the repetitions of the loop. This mode is intended for use with
variables that have a scalar value at each iteration, for example the error sum of squares from a
regression. Data series cannot be printed in this way, and neither can matrices.
store: This command writes out the values of the specified scalars, from each time round the
loop, to a specified file. Thus it keeps a complete record of their values across the iterations. For
example, coefficient estimates could be saved in this way so as to permit subsequent examination
of their frequency distribution. Only one such store can be used in a given loop.

9.4 Loop examples

Monte Carlo example
A simple example of a Monte Carlo loop in “progressive” mode is shown in Example 9.1.
This loop will print out summary statistics for the ‘a’ and ‘b’ estimates and R 2 across the 100 rep-
etitions. After running the loop, coeffs.gdt, which contains the individual coefficient estimates
from all the runs, can be opened in gretl to examine the frequency distribution of the estimates in
detail.
The command nulldata is useful for Monte Carlo work. Instead of opening a “real” data set,
nulldata 50 (for instance) opens a dummy data set, containing just a constant and an index vari-
able, with a series length of 50. Constructed variables can then be added using the genr command.
See the set command for information on generating repeatable pseudo-random series.
Chapter 9. Loop constructs 54

Example 9.1: Simple Monte Carlo loop

nulldata 50
set seed 547
genr x = 100 * uniform()
# open a "progressive" loop, to be repeated 100 times
loop 100 --progressive
genr u = 10 * normal()
# construct the dependent variable
genr y = 10*x + u
# run OLS regression
ols y const x
# grab the coefficient estimates and R-squared
genr a = $coeff(const)
genr b = $coeff(x)
genr r2 = $rsq
# arrange for printing of stats on these
print a b r2
# and save the coefficients to file
store coeffs.gdt a b
endloop

Iterated least squares

Example 9.2 uses a “while” loop to replicate the estimation of a nonlinear consumption function of
the form

C = α + βY γ + 

as presented in Greene (2000), Example 11.3. This script is included in the gretl distribution under
the name greene11_3.inp; you can find it in gretl under the menu item “File, Script files, Practice
file, Greene...”.
The option --print-final for the ols command arranges matters so that the regression results
will not be printed each time round the loop, but the results from the regression on the last iteration
will be printed when the loop terminates.
Example 9.3 shows how a loop can be used to estimate an ARMA model, exploiting the “outer
product of the gradient” (OPG) regression discussed by Davidson and MacKinnon in their Estimation
and Inference in Econometrics.

Indexed loop examples

Example 9.4 shows an indexed loop in which the smpl is keyed to the index variable i. Suppose we
have a panel dataset with observations on a number of hospitals for the years 1991 to 2000 (where
the year of the observation is indicated by a variable named year). We restrict the sample to each
of these years in turn and print cross-sectional summary statistics for variables 1 through 4.
Example 9.5 illustrates string substitution in an indexed loop.
The first time round this loop the variable V will be set to equal COMP1987 and the dependent
variable for the ols will be PBT1987. The next time round V will be redefined as equal to COMP1988
and the dependent variable in the regression will be PBT1988. And so on.
Chapter 9. Loop constructs 55

Example 9.2: Nonlinear consumption function

open greene11_3.gdt
# run initial OLS
ols C 0 Y
genr essbak = $ess
genr essdiff = 1
genr beta = $coeff(Y)
genr gamma = 1
# iterate OLS till the error sum of squares converges
loop while essdiff > .00001
# form the linearized variables
genr C0 = C + gamma * beta * Y^gamma * log(Y)
genr x1 = Y^gamma
genr x2 = beta * Y^gamma * log(Y)
# run OLS
ols C0 0 x1 x2 --print-final --no-df-corr --vcv
genr beta = $coeff(x1)
genr gamma = $coeff(x2)
genr ess = $ess
genr essdiff = abs(ess - essbak)/essbak
genr essbak = ess
endloop
# print parameter estimates using their "proper names"
set echo off
printf "alpha = %g\n", $coeff(0)
printf "beta = %g\n", beta
printf "gamma = %g\n", gamma
Chapter 9. Loop constructs 56

Example 9.3: ARMA 1, 1

open armaloop.gdt

genr c = 0
genr a = 0.1
genr m = 0.1

series e = 1.0
genr de_c = e
genr de_a = e
genr de_m = e

genr crit = 1
loop while crit > 1.0e-9

# one-step forecast errors

genr e = y - c - a*y(-1) - m*e(-1)

# log-likelihood
genr loglik = -0.5 * sum(e^2)
print loglik

# partials of forecast errors wrt c, a, and m

genr de_c = -1 - m * de_c(-1)
genr de_a = -y(-1) -m * de_a(-1)
genr de_m = -e(-1) -m * de_m(-1)

# partials of l wrt c, a and m

genr sc_c = -de_c * e
genr sc_a = -de_a * e
genr sc_m = -de_m * e

# OPG regression
ols const sc_c sc_a sc_m --print-final --no-df-corr --vcv

# Update the parameters

genr dc = $coeff(sc_c)
genr c = c + dc
genr da = $coeff(sc_a)
genr a = a + da
genr dm = $coeff(sc_m)
genr m = m + dm

printf " constant = %.8g (gradient = %#.6g)\n", c, dc

printf " ar1 coefficient = %.8g (gradient = %#.6g)\n", a, da
printf " ma1 coefficient = %.8g (gradient = %#.6g)\n", m, dm

genr crit = $T - $ess

print crit
endloop

genr se_c = $stderr(sc_c)

genr se_a = $stderr(sc_a)
genr se_m = $stderr(sc_m)

set echo off

printf "\n"
printf "constant = %.8g (se = %#.6g, t = %.4f)\n", c, se_c, c/se_c
printf "ar1 term = %.8g (se = %#.6g, t = %.4f)\n", a, se_a, a/se_a
printf "ma1 term = %.8g (se = %#.6g, t = %.4f)\n", m, se_m, m/se_m
Chapter 9. Loop constructs 57

Example 9.4: Panel statistics

open hospitals.gdt
loop i=1991..2000
smpl (year=i) --restrict --replace
summary 1 2 3 4
endloop

Example 9.5: String substitution

open bea.dat
loop i=1987..2001
genr V = COMP$i
genr TC = GOC$i - PBT$i
genr C = TC - V
ols PBT$i const TC V
endloop
 Chapter 10

User-defined functions

10.1 Defining a function

Gretl offers a mechanism for defining functions, which may be called via the command line, in
the context of a script, or (if packaged appropriately, see section 10.5) via the program’s graphical
interface.
The syntax for defining a function looks like this:1
function return-type function-name (parameters)
function body
end function
The opening line of a function definition contains these elements, in strict order:

1. The keyword function.

2. return-type, which states the type of value returned by the function, if any. This must be one
of void (if the function does not return anything), scalar, series, matrix, list or string.

3. function-name, the unique identifier for the function. Names must start with a letter. They
have a maximum length of 31 characters; if you type a longer name it will be truncated.
Function names cannot contain spaces. You will get an error if you try to define a function
having the same name as an existing gretl command.

4. The functions’s parameters, in the form of a comma-separated list enclosed in parentheses.

This may be run into the function name, or separated by white space as shown.

Function parameters can be of any of the types shown below.2

Type Description
bool scalar variable acting as a Boolean switch
int scalar variable acting as an integer
scalar scalar variable
series data series
list named list of series
matrix matrix or vector
string string variable or string literal
bundle all-purpose container (see section 11.7)

Each element in the listing of parameters must include two terms: a type specifier, and the name
by which the parameter shall be known within the function. An example follows:
1 The syntax given here differs from the standard prior to gretl version 1.8.4. For reasons of backward compatibility

the old syntax is still supported; see section 10.6 for details.
2 An additional parameter type is available for GUI use, namely obs; this is equivalent to int except for the way it is

represented in the graphical interface for calling a function.

58
Chapter 10. User-defined functions 59

function scalar myfunc (series y, list xvars, bool verbose)

Each of the type-specifiers, with the exception of list and string, may be modified by prepending
an asterisk to the associated parameter name, as in

function scalar myfunc (series *y, scalar *b)

The meaning of this modification is explained below (see section 10.4); it is related to the use of
pointer arguments in the C programming language.

Function parameters: optional refinements

Besides the required elements mentioned above, the specification of a function parameter may
include some additional fields, as follows:

• The const modifier.

• For scalar or int parameters: minimum, maximum and default values; or for bool parame-
ters, just a default value.

• For optional pointer and list arguments (see section 10.4), the special default value null.

• For all parameters, a descriptive string.

• For int parameters with minimum and maximum values specified, a set of strings to associate
with the allowed numerical values (value labels).

The first two of these options may be useful in many contexts; the last two may be helpful if a
function is to be packaged for use in the gretl GUI (but probably not otherwise). We now expand on
each of the options.

• The const modifier: must be given as a prefix to the basic parameter specification, as in
const matrix M

This constitutes a promise that the corresponding argument will not be modified within the
function; gretl will flag an error if the function attempts to modify the argument.

• Minimum, maximum and default values for scalar or int types: These values should di-
rectly follow the name of the parameter, enclosed in square brackets and with the individual
elements separated by colons. For example, suppose we have an integer parameter order for
which we wish to specify a minimum of 1, a maximum of 12, and a default of 4. We can write
int order[1:12:4]

If you wish to omit any of the three specifiers, leave the corresponding field empty. For
example [1::4] would specify a minimum of 1 and a default of 4 while leaving the maximum
unlimited.
For a parameter of type bool (whose values are just zero or non-zero), you can specify a
default of 1 (true) or 0 (false), as in
bool verbose[0]

• Descriptive string: This will show up as an aid to the user if the function is packaged (see
section 10.5 below) and called via gretl’s graphical interface. The string should be enclosed
in double quotes and separated from the preceding elements of the parameter specification
with a space, as in
series y "dependent variable"
Chapter 10. User-defined functions 60

• Value labels: These may be used only with int parameters for which minimum and maximum
values have been specified, so there is a fixed number of admissible values, and the number
of labels must match the number of values. They will show up in the graphical interface
in the form of a drop-down list, making the function writer’s intent clearer when an integer
argument represents a categorical selection. A set of value labels must be enclosed in braces,
and the individual labels must be enclosed in double quotes and separated by commas or
spaces. For example:
int case[1:3:1] {"Fixed effects", "Between model", "Random effects"}

If two or more of the trailing optional fields are given in a parameter specification, they must be
given in the order shown above: min–max–default, description, value labels. Note that there is
no facility for “escaping” characters within descriptive strings or value labels; these may contain
spaces but they cannot contain the double-quote character.
Here is an example of a well-formed function specification using all the elements mentioned above:

function matrix myfunc (series y "dependent variable",

list X "regressors",
int p[0::1] "lag order",
int c[1:2:1] "criterion" {"AIC", "BIC"},
bool quiet[0])

One advantage of specifying default values for parameters, where applicable, is that in script or
command-line mode users may omit trailing arguments that have defaults. For example, myfunc
above could be invoked with just two arguments, corresponding to y and X; implicitly p = 1, c = 1
and quiet is false.

Functions taking no parameters

You may define a function that has no parameters (these are called “routines” in some programming
languages). In this case, use the keyword void in place of the listing of parameters:

function matrix myfunc2 (void)

The function body

The function body is composed of gretl commands, or calls to user-defined functions (that is,
function calls may be nested). A function may call itself (that is, functions may be recursive). While
the function body may contain function calls, it may not contain function definitions. That is, you
cannot define a function inside another function. For further details, see section 10.4.

10.2 Calling a function

A user function is called by typing its name followed by zero or more arguments enclosed in
parentheses. If there are two or more arguments these should be separated by commas.
There are automatic checks in place to ensure that the number of arguments given in a function
call matches the number of parameters, and that the types of the given arguments match the types
specified in the definition of the function. An error is flagged if either of these conditions is violated.
One qualification: allowance is made for omitting arguments at the end of the list, provided that
default values are specified in the function definition. To be precise, the check is that the number
of arguments is at least equal to the number of required parameters, and is no greater than the
total number of parameters.
A scalar, series or matrix argument to a function may be given either as the name of a pre-existing
variable or as an expression which evaluates to a variable of the appropriate type. Scalar arguments
may also be given as numerical values. List arguments must be specified by name.
Chapter 10. User-defined functions 61

The following trivial example illustrates a function call that correctly matches the function defini-
tion.

# function definition
function scalar ols_ess(series y, list xvars)
ols y 0 xvars --quiet
scalar myess = $ess
printf "ESS = %g\n", myess
return myess
end function
# main script
open data4-1
list xlist = 2 3 4
# function call (the return value is ignored here)
ols_ess(price, xlist)

The function call gives two arguments: the first is a data series specified by name and the second
is a named list of regressors. Note that while the function offers the variable myess as a return
value, it is ignored by the caller in this instance. (As a side note here, if you want a function to
calculate some value having to do with a regression, but are not interested in the full results of the
regression, you may wish to use the --quiet flag with the estimation command as shown above.)
A second example shows how to write a function call that assigns a return value to a variable in the
caller:

# function definition
function series get_uhat(series y, list xvars)
ols y 0 xvars --quiet
series uh = $uhat
return uh
end function
# main script
open data4-1
list xlist = 2 3 4
# function call
series resid = get_uhat(price, xlist)

10.3 Deleting a function

If you have defined a function and subsequently wish to clear it out of memory, you can do so using
the keywords delete or clear, as in

function myfunc delete

function get_uhat clear

Note, however, that if myfunc is already a defined function, providing a new definition automatically
overwrites the previous one, so it should rarely be necessary to delete functions explicitly.

10.4 Function programming details

Variables versus pointers
Series, scalar, and matrix arguments to functions can be passed in two ways: “as they are”, or as
pointers. For example, consider the following:

function series triple1(series x)

return 3*x
Chapter 10. User-defined functions 62

end function

function series triple2(series *x)

return 3*x
end function

These two functions are nearly identical (and yield the same result); the only difference is that you
need to feed a series into triple1, as in triple1(myseries), while triple2 must be supplied a
pointer to a series, as in triple2(&myseries).
Why make the distinction? There are two main reasons for doing so: modularity and performance.
By modularity we mean the insulation of a function from the rest of the script which calls it. One of
the many benefits of this approach is that your functions are easily reusable in other contexts. To
achieve modularity, variables created within a function are local to that function, and are destroyed
when the function exits, unless they are made available as return values and these values are “picked
up” or assigned by the caller.
In addition, functions do not have access to variables in “outer scope” (that is, variables that exist
in the script from which the function is called) except insofar as these are explicitly passed to the
function as arguments.
By default, when a variable is passed to a function as an argument, what the function actually “gets”
is a copy of the outer variable, which means that the value of the outer variable is not modified by
anything that goes on inside the function. But the use of pointers allows a function and its caller
to cooperate such that an outer variable can be modified by the function. In effect, this allows a
function to “return” more than one value (although only one variable can be returned directly —
see below). The parameter in question is marked with a prefix of * in the function definition, and
the corresponding argument is marked with the complementary prefix & in the caller. For example,

function series get_uhat_and_ess(series y, list xvars, scalar *ess)

ols y 0 xvars --quiet
ess = $ess
series uh = $uhat
return uh
end function
# main script
open data4-1
list xlist = 2 3 4
# function call
scalar SSR
series resid = get_uhat_and_ess(price, xlist, &SSR)

In the above, we may say that the function is given the address of the scalar variable SSR, and it
assigns a value to that variable (under the local name ess). (For anyone used to programming in C:
note that it is not necessary, or even possible, to “dereference” the variable in question within the
function using the * operator. Unadorned use of the name of the variable is sufficient to access the
variable in outer scope.)
An “address” parameter of this sort can be used as a means of offering optional information to the
caller. (That is, the corresponding argument is not strictly needed, but will be used if present). In
that case the parameter should be given a default value of null and the the function should test to
see if the caller supplied a corresponding argument or not, using the built-in function isnull().
For example, here is the simple function shown above, modified to make the filling out of the ess
value optional.

function series get_uhat_and_ess(series y, list xvars, scalar *ess[null])

ols y 0 xvars --quiet
if !isnull(ess)
ess = $ess
Chapter 10. User-defined functions 63

endif
return $uhat
end function

If the caller does not care to get the ess value, it can use null in place of a real argument:

series resid = get_uhat_and_ess(price, xlist, null)

Alternatively, trailing function arguments that have default values may be omitted, so the following
would also be a valid call:

series resid = get_uhat_and_ess(price, xlist)

Pointer arguments may also be useful for optimizing performance: even if a variable is not modified
inside the function, it may be a good idea to pass it as a pointer if it occupies a lot of memory.
Otherwise, the time gretl spends transcribing the value of the variable to the local copy may be
non-negligible, compared to the time the function spends doing the job it was written for.
Example 10.1 takes this to the extreme. We define two functions which return the number of rows
of a matrix (a pretty fast operation). One function gets a matrix as argument, the other one a pointer
to a matrix. The two functions are evaluated on a matrix with 2000 rows and 2000 columns; on a
typical system, floating-point numbers take 8 bytes of memory, so the space occupied by the matrix
is roughly 32 megabytes.
Running the code in example 10.1 will produce output similar to the following (the actual numbers
depend on the machine you’re running the example on):

Elapsed time:
without pointers (copy) = 3.66 seconds,
with pointers (no copy) = 0.01 seconds.

If a pointer argument is used for this sort of purpose — and the object to which the pointer points
is not modified by the function — it is a good idea to signal this to the user by adding the const
qualifier, as shown for function b in Example 10.1. When a pointer argument is qualified in this
way, any attempt to modify the object within the function will generate an error.
One limitation on the use of pointer-type arguments should be noted: you cannot supply a given
variable as a pointer argument more than once in any given function call. For example, suppose we
have a function that takes two matrix-pointer arguments,

function scalar pointfunc (matrix *a, matrix *b)

And suppose we have two matrices, x and y, at the caller level. The call

pointfunc(&x, &y)

is OK, but the call

pointfunc(&x, &x) # will not work

will generate an error.

List arguments
The use of a named list as an argument to a function gives a means of supplying a function with
a set of variables whose number is unknown when the function is written — for example, sets of
regressors or instruments. Within the function, the list can be passed on to commands such as
ols.
Chapter 10. User-defined functions 64

Example 10.1: Performance comparison: values versus pointer

function scalar a(matrix X)

return rows(X)
end function

function scalar b(const matrix *X)

return rows(X)
end function

nulldata 10
set echo off
set messages off
X = zeros(2000,2000)
r = 0

set stopwatch
loop 100
r = a(X)
endloop
fa = $stopwatch

set stopwatch
loop 100
r = b(&X)
endloop
fb = $stopwatch

printf "Elapsed time:\n\

\twithout pointers (copy) = %g seconds,\n\
\twith pointers (no copy) = %g seconds.\n", fa, fb
Chapter 10. User-defined functions 65

A list argument can also be “unpacked” using a foreach loop construct, but this requires some
care. For example, suppose you have a list X and want to calculate the standard deviation of each
variable in the list. You can do:

loop foreach i X
scalar sd_$i = sd(X.$i)
endloop

Please note: a special piece of syntax is needed in this context. If we wanted to perform the above
task on a list in a regular script (not inside a function), we could do

loop foreach i X
scalar sd_$i = sd($i)
endloop

where $i gets the name of the variable at position i in the list, and sd($i) gets its standard
deviation. But inside a function, working on a list supplied as an argument, if we want to reference
an individual variable in the list we must use the syntax listname.varname. Hence in the example
above we write sd(X.$i).
This is necessary to avoid possible collisions between the name-space of the function and the name-
space of the caller script. For example, suppose we have a function that takes a list argument, and
that defines a local variable called y. Now suppose that this function is passed a list containing
a variable named y. If the two name-spaces were not separated either we’d get an error, or the
external variable y would be silently over-written by the local one. It is important, therefore, that
list-argument variables should not be “visible” by name within functions. To “get hold of” such
variables you need to use the form of identification just mentioned: the name of the list, followed
by a dot, followed by the name of the variable.

Constancy of list arguments When a named list of variables is passed to a function, the function
is actually provided with a copy of the list. The function may modify this copy (for instance, adding
or removing members), but the original list at the level of the caller is not modified.

Optional list arguments If a list argument to a function is optional, this should be indicated by
appending a default value of null, as in

function scalar myfunc (scalar y, list X[null])

In that case, if the caller gives null as the list argument (or simply omits the last argument) the
named list X inside the function will be empty. This possibility can be detected using the nelem()
function, which returns 0 for an empty list.

String arguments
String arguments can be used, for example, to provide flexibility in the naming of variables created
within a function. In the following example the function mavg returns a list containing two moving
averages constructed from an input series, with the names of the newly created variables governed
by the string argument.

function list mavg (series y, string vname)

series @vname_2 = (y+y(-1)) / 2
series @vname_4 = (y+y(-1)+y(-2)+y(-3)) / 4
list retlist = @vname_2 @vname_4
return retlist
end function
Chapter 10. User-defined functions 66

open data9-9
list malist = mavg(nocars, "nocars")
print malist --byobs

The last line of the script will print two variables named nocars_2 and nocars_4. For details on
the handling of named strings, see chapter 12.
If a string argument is considered optional, it may be given a null default value, as in

function scalar foo (series y, string vname[null])

Retrieving the names of arguments

The variables given as arguments to a function are known inside the function by the names of the
corresponding parameters. For example, within the function whose signature is

function void somefun (series y)

we have the series known as y. It may be useful, however, to be able to determine the names of
the variables provided as arguments. This can be done using the function argname, which takes
the name of a function parameter as its single argument and returns a string. Here is a simple
illustration:

function void namefun (series y)

printf "the series given as ’y’ was named %s\n", argname(y)
end function

open data9-7
namefun(QNC)

This produces the output

the series given as ’y’ was named QNC

Please note that this will not always work: the arguments given to functions may be anonymous
variables, created on the fly, as in somefun(log(QNC)) or somefun(CPI/100). In that case the
argname function fails to return a string. Function writers who wish to make use of this facility
should check the return from argname using the isstring() function, which returns 1 when given
the name of a string variable, 0 otherwise.

Return values
Functions can return nothing (just printing a result, perhaps), or they can return a single variable
— a scalar, series, list, matrix, string, or bundle (see section 11.7). The return value, if any, is
specified via a statement within the function body beginning with the keyword return, followed by
either the name of a variable (which must be of the type announced on the first line of the function
definition) or an expression which produces a value of the correct type.
Having a function return a list or bundle is a way of permitting the “return” of more than one
variable. For example, you can define several series inside a function and package them as a list;
in this case they are not destroyed when the function exits. Here is a simple example, which also
illustrates the possibility of setting the descriptive labels for variables generated in a function.

function list make_cubes (list xlist)

list cubes = null
loop foreach i xlist --quiet
Chapter 10. User-defined functions 67

series $i3 = (xlist.$i)^3

setinfo $i3 -d "cube of $i"
list cubes += $i3
endloop
return cubes
end function

open data4-1
list xlist = price sqft
list cubelist = make_cubes(xlist)
print xlist cubelist --byobs
labels

A return statement causes the function to return (exit) at the point where it appears within the
body of the function. A function may also exit when (a) the end of the function code is reached (in
the case of a function with no return value), (b) a gretl error occurs, or (c) a funcerr statement is
reached.
The funcerr keyword, which may be followed by a string enclosed in double quotes, causes a
function to exit with an error flagged. If a string is provided, this is printed on exit, otherwise a
generic error message is printed. This mechanism enables the author of a function to pre-empt an
ordinary execution error and/or offer a more specific and helpful error message. For example,

if nelem(xlist) = 0
funcerr "xlist must not be empty"
endif

A function may contain more than one return statement, as in

function scalar multi (bool s)

if s
return 1000
else
return 10
endif
end function

However, it is recommended programming practice to have a single return point from a function
unless this is very inconvenient. The simple example above would be better written as

function scalar multi (bool s)

return s ? 1000 : 10
end function

Error checking
When gretl first reads and “compiles” a function definition there is minimal error-checking: the
only checks are that the function name is acceptable, and, so far as the body is concerned, that you
are not trying to define a function inside a function (see Section 10.1). Otherwise, if the function
body contains invalid commands this will become apparent only when the function is called and
its commands are executed.

Debugging
The usual mechanism whereby gretl echoes commands and reports on the creation of new variables
is by default suppressed when a function is being executed. If you want more verbose output from
a particular function you can use either or both of the following commands within the function:
Chapter 10. User-defined functions 68

set echo on
set messages on

Alternatively, you can achieve this effect for all functions via the command set debug 1. Usually
when you set the value of a state variable using the set command, the effect applies only to the
current level of function execution. For instance, if you do set messages on within function f1,
which in turn calls function f2, then messages will be printed for f1 but not f2. The debug variable,
however, acts globally; all functions become verbose regardless of their level.
Further, you can do set debug 2: in addition to command echo and the printing of messages, this
is equivalent to setting max_verbose (which produces verbose output from the BFGS maximizer) at
all levels of function execution.

10.5 Function packages

Since gretl 1.6.0 there has been a mechanism to package functions and make them available to
other users of gretl. Here is a walk-through of the process.

Load a function in memory

There are several ways to load a function:

• If you have a script file containing function definitions, open that file and run it.

• Create a script file from scratch. Include at least one function definition, and run the script.

• Open the GUI console and type a function definition interactively. This method is not partic-
ularly recommended; you are probably better composing a function non-interactively.

For example, suppose you decide to package a function that returns the percentage change of a
time series. Open a script file and type

function series pc(series y "Series to process")

return 100 * diff(y)/y(-1)
end function

In this case, we have appended a string to the function argument, as explained in section 10.1, so
as to make our interface more informative. This is not obligatory: if you omit the descriptive string,
gretl will supply a predefined one.
Now run your function. You may want to make sure it works properly by running a few tests. For
example, you may open the console and type

genr x = uniform()
genr dpcx = pc(x)
print x dpcx --byobs

You should see something similar to figure 10.1. The function seems to work ok. Once your
function is debugged, you may proceed to the next stage.

Create a package
We first present the mechanism for creating a function package via gretl’s graphical interface. This
can also be done via the command line, which offers some additional functionality for package
authors; an explanation is given later in this section.
Chapter 10. User-defined functions 69

Figure 10.1: Output of function check

Start the GUI program and take a look at the “File, Function files” menu. This menu contains four
items: “On local machine”, “On server”, “Edit package”, “New package”.
Select “New package”. (This will produce an error message unless at least one user-defined function
is currently loaded in memory — see the previous point.) In the first dialog you get to select:

• A public function to package.

• Zero or more “private” helper functions.

Public functions are directly available to users; private functions are part of the “behind the scenes”
mechanism in a function package.
On clicking “OK” a second dialog should appear (see Figure 10.2), where you get to enter the package
information (author, version, date, and a short description). You can also enter help text for the
public interface. You have a further chance to edit the code of the function(s) to be packaged, by
clicking on “Edit function code”. (If the package contains more than one function, a drop-down
selector will be shown.) And you get to add a sample script that exercises your package. This
will be helpful for potential users, and also for testing. A sample script is required if you want to
upload the package to the gretl server (for which a check-box is supplied).
You won’t need it right now, but the button labeled “Save as script” allows you to “reverse engineer”
a function package, writing out a script that contains all the relevant function definitions.
Clicking “Save” in this dialog leads you to a File Save dialog. All being well, this should be pointing
towards a directory named functions, either under the gretl system directory (if you have write
permission on that) or the gretl user directory. This is the recommended place to save function
package files, since that is where the program will look in the special routine for opening such files
(see below).
Needless to say, the menu command “File, Function files, Edit package” allows you to make changes
to a local function package.

A word on the file you just saved. By default, it will have a .gfn extension. This is a “function
package” file: unlike an ordinary gretl script file, it is an XML file containing both the function code
and the extra information entered in the packager. Hackers might wish to write such a file from
scratch rather than using the GUI packager, but most people are likely to find it awkward. Note
Chapter 10. User-defined functions 70

Figure 10.2: The package editor window

that XML-special characters in the function code have to be escaped, e.g. & must be represented as
&amp;. Also, some elements of the function syntax differ from the standard script representation:
the parameters and return values (if any) are represented in XML. Basically, the function is pre-
parsed, and ready for fast loading using libxml.

Load a package
Why package functions in this way? To see what’s on offer so far, try the next phase of the walk-
through.
Close gretl, then re-open it. Now go to “File, Function files, On local machine”. If the previous stage
above has gone OK, you should see the file you packaged and saved, with its short description. If
you click on “Info” you get a window with all the information gretl has gleaned from the function
package. If you click on the “View code” icon in the toolbar of this new window, you get a script
view window showing the actual function code. Now, back to the “Function packages” window, if
you click on the package’s name, the relevant functions are loaded into gretl’s workspace, ready to
be called by clicking on the “Call” button.
After loading the function(s) from the package, open the GUI console. Try typing help foo, replac-
ing foo with the name of the public interface from the loaded function package: if any help text
was provided for the function, it should be presented.
In a similar way, you can browse and load the function packages available on the gretl server, by
selecting “File, Function files, On server”.
Once your package is installed on your local machine, you can use the function it contains via
the graphical interface as described above, or by using the CLI, namely in a script or through the
console. In the latter case, you load the function via the include command, specifying the package
file as the argument, complete with the .gfn extension.
To continue with our example, load the file np.gdt (supplied with gretl among the sample datasets).
Suppose you want to compute the rate of change for the variable iprod via your new function and
Chapter 10. User-defined functions 71

Figure 10.3: Using your package

store the result in a series named foo.

Go to “File, Function files, On local machine”. You will be shown a list of the installed packages,
including the one you have just created. If you select it and click on “Execute” (or double-click on
the name of the function package), a window similar to the one shown in figure 10.3 will appear.
Notice that the description string “Series to process”, supplied with the function definition, appears
to the left of the top series chooser.
Click “Ok” and the series foo will be generated (see figure 10.4). Under some circumstances you
might have to press the “r” key (refresh) to have your new variable show up the main window
variable list.

Figure 10.4: Percent change in industrial production

Alternatively, the same could have been accomplished by the script

Chapter 10. User-defined functions 72

include pc.gfn
open np
foo = pc(iprod)

Creating a package via the command line

The mechanism described above, for creating function packages using the GUI, is likely to be con-
venient for small to medium-sized packages but may be too cumbersome for ambitious packages
that include a large hierarchy of private functions. To facilitate the building of such packages gretl
offers the makepkg command.
To use makepkg you create three files: a driver script that loads all the functions you want to pack-
age and invokes makepkg; a small, plain-text specification file that contains the required package
details (author, version, etc.); and (in the simplest case) a plain text help file. You run the driver
script and gretl writes the package (.gfn) file.
We first illustrate with a simple notional package. We have a gretl script file named foo.inp that
contains a function, foo, that we want to package. Our driver script would then look like this

include foo.inp
makepkg foo.gfn

Note that the makepkg command takes one argument, the name of the package file to be created.
The package specification file should have the same basename but the extension .spec. In this case
gretl will therefore look for foo.spec. It should look something like this:

# foo.spec
author = A. U. Thor
version = 1.0
date = 2011-02-01
description = Does something with time series
public = foo
help = foohelp.txt
sample-script = example.inp
min-version = 1.9.3
data-requirement = needs-time-series-data

As you can see, the format of each line in this file is key = value, with two qualifications: blank
lines are permitted (and ignored, as are comment lines that start with #).
All the fields included in the above example are required, with the exception of data-requirement,
though the order in which they appear is immaterial. Here’s a run-down of the basic fields:

• author: the name(s) of the author(s). Accented or other non-ASCII characters should be given
as UTF-8.

• version: the version number of the package, which should be limited to two integers sepa-
rated by a period.

• date: the release date of the current verson of the package, in ISO 8601 format: YYYY-MM-DD.

• description: a brief description of the functionality offered by the package. This will be
displayed in the GUI function packages window so it should be just one short line.

• public: the listing of public functions.

• help: the name of a plain text (UTF-8) file containing help; all packages must provide help.

• sample-script: the name of a sample script that illustrates use of the package; all packages
must supply a sample script.
Chapter 10. User-defined functions 73

• min-version: the minimum version of gretl required for the package to work correctly. If
you’re unsure about this, the conservative thing is to give the current gretl version.

The public field indicates which function or functions are to be made directly available to users (as
opposed to private “helper” functions). In the example above there is just one public function. Note
that any functions in memory when makepkg is invoked, other than those designated as public, are
assumed to be private functions that should also be included in the package. That is, the list of
private functions (if any) is implicit.
The data-requirement field should be specified if the package requires time-series or panel data,
or alternatively if no dataset is required. If the data-requirement field is omitted, the assumption
is that the package needs a dataset in place, but it doesn’t matter what kind; if the packaged
functions do not use any series or lists this requirement can be explicitly relaxed. Valid values for
this field are:

needs-time-series-data (any time-series data OK)

needs-qm-data (must be quarterly or monthly)
needs-panel-data (must be a panel)
no-data-ok (no dataset is needed)

For a more complex example, let’s look at the gig (GARCH-in-gretl) package. The driver script for
building gig looks something like this:

set echo off

set messages off
include gig_mle.inp
include gig_setup.inp
include gig_estimate.inp
include gig_printout.inp
include gig_plot.inp
makepkg gig.gfn

In this case the functions to be packaged (of which there are many) are distributed across several
script files, each of which is the target of an include command. The set commands at the top are
included to cut down on the verbosity of the output.
The content of gig.spec is as follows:

author = Riccardo "Jack" Lucchetti and Stefano Balietti

version = 2.0
date = 2010-12-21
description = An assortment of univariate GARCH models
public = GUI_gig \
gig_setup gig_set_dist gig_set_pq gig_set_vQR \
gig_print gig_estimate \
gig_plot gig_dplot \
gig_bundle_print GUI_gig_plot

gui-main = GUI_gig
bundle-print = gig_bundle_print
bundle-plot = GUI_gig_plot
help = gig.pdf
sample-script = examples/example1.inp
min-version = 1.9.3
data-requirement = needs-time-series-data

Note that backslash continuation can be used for the elements of the public function listing.
Chapter 10. User-defined functions 74

In addition to the fields shown in the simple example above, gig.spec includes three optional
fields: gui-main, bundle-print and bundle-plot. These keywords are used to designate certain
functions as playing a special role in the gretl graphical interface. A function picked out in this way
must be in the public list and must satisfy certain further requirements.

• gui-main: this specifies a function as the one which will be presented automatically to GUI
users (instead of users’ being faced with a choice of interfaces). This makes sense only for
packages that have multiple public functions. In addition, the gui-main function must return
a bundle (see section 11.7).

• bundle-print: this picks out a function that should be used to print the contents of a bundle
returned by the gui-main function. It must take a pointer-to-bundle as its first argument.
The second argument, if present, should be an int switch, with two or more valid values, that
controls the printing in some way. Any further arguments must have default values specified
so that they can be omitted.

• bundle-plot: selects a function for the role of producing a plot or graph based on the con-
tents of a returned bundle. The requirements on this function are as for bundle-print.

The “GUI special” tags support a user-friendly mode of operation. On a successful call to gui-main,
gretl opens a window displaying the contents of the returned bundle (formatted via bundle-print).
Menus in this window give the user the option of saving the entire bundle (in which case it’s rep-
resented as an icon in the “icon view” window) or of extracting specific elements from the bundle
(series or matrices, for example).
If the package has a bundle-plot function, the bundle window also has a Graph menu. In gig, for
example, the bundle-plot function has this signature:

function void GUI_gig_plot(bundle *model, int ptype[0:1:0] \

"Plot type" {"Time series", "Density"})

The ptype switch is used to choose between a time-series plot of the residual and its conditional
variance, and a kernel density plot of the innovation against the theoretical distribution it is sup-
posed to follow. The use of the value-labels Time series and Density means that the Graph menu
will display these two choices.
One other feature of the gig spec file is noteworthy: the help field specifies gig.pdf, documenta-
tion in PDF format. Unlike plain-text help, this cannot be rolled into the gfn (XML) file produced
by the makepkg command; rather, both gig.gfn and gig.pdf are packaged into a zip archive for
distribution. This represents a form of package which is new in gretl 1.9.4. More details will be
made available before long.

10.6 Memo: updating old-style functions

As mentioned at the start of this chapter, different rules were in force for defining functions prior
to gretl 1.8.4. While the old syntax is still supported to date, this may not always be the case. But
it is straightforward to convert a function to the new style. The only thing that must be changed
for compatibility with the new syntax is the declaration of the function’s return type. Previously
this was placed inline in the return statement, whereas now it is placed right after the function
keyword. For example:

# old style
function triple (series x)
y = 3*x
return series y # note the "series" here
end function
Chapter 10. User-defined functions 75

# new style
function series triple (series x)
y = 3*x
return y
end function

Note also that the role of the return statement has changed (and its use has become more flexible):

• The return statement now causes the function to return directly, and you can have more
than one such statement, wrapped in conditionals. Before there could only be one return
statement, and its role was just to specify the type available for assignment by the caller.

• The final element in the return statement can now be an expression that evaluates to a value
of the advertised return type; before, it had to be the name of a pre-defined variable.
 Chapter 11

Gretl data types

11.1 Introduction
Gretl offers the following data types:

scalar holds a single numerical value

series holds n numerical values, where n is the number of observations in the current
dataset
matrix holds a rectangular array of numerical values, of any dimensions
list holds the ID numbers of a set of series
string holds an array of characters
bundle holds a variable number of objects of various types

The “numerical values” mentioned above are all double-precision floating point numbers.
In this chapter we give a run-down of the basic characteristics of each of these types and also
explain their “life cycle” (creation, modification and destruction). The list and matrix types, whose
uses are relatively complex, are discussed at greater length in the following two chapters.

11.2 Series
We begin with the series type, which is the oldest and in a sense the most basic type in gretl. When
you open a data file in the gretl GUI, what you see in the main window are the ID numbers, names
(and descriptions, if available) of the series read from the file. All the series existing at any point in
a gretl session are of the same length, although some may have missing values. The variables that
can be added via the items under the Add menu in the main window (logs, squares and so on) are
also series.
For a gretl session to contain any series, a common series length must be established. This is
usually achieved by opening a data file, or importing a series from a database, in which case the
length is set by the first import. But one can also use the nulldata command, which takes as it
single argument the desired length, a positive integer.
Each series has these basic attributes: an ID number, a name, and of course n numerical values. In
addition a series may have a description (which is shown in the main window and is also accessible
via the labels command), a “display name” for use in graphs, a record of the compaction method
used in reducing the variable’s frequency (for time-series data only) and a flag marking the variable
as discrete. These attributes can be edited in the GUI by choosing Edit Attributes (either under the
Variable menu or via right-click), or by means of the setinfo command.
In the context of most commands you are able to reference series by name or by ID number as you
wish. The main exception is the definition or modification of variables via a formula; here you must
use names since ID numbers would get confused with numerical constants.
Note that series ID numbers are always consecutive, and the ID number for a given series will change
if you delete a lower-numbered series. In some contexts, where gretl is liable to get confused by
such changes, deletion of low-numbered series is disallowed.

76
Chapter 11. Gretl data types 77

11.3 Scalars
The scalar type is relatively simple: just a convenient named holder for a single numerical value.
Scalars have none of the additional attributes pertaining to series, do not have public ID numbers,
and must be referenced by name. A common use of scalar variables is to record information made
available by gretl commands for further processing, as in scalar s2 = $sigmaˆ2 to record the
square of the standard error of the regression following an estimation command such as ols.
You can define and work with scalars in gretl without having any dataset in place.
In the gretl GUI, scalar variables can be inspected and their values edited via the “Icon view” (see
the View menu in the main window).

11.4 Matrices
Matrices in gretl work much as in other mathematical software (e.g. MATLAB, Octave). Like scalars
they have no public ID numbers and must be referenced by name, and they can be used without any
dataset in place. Matrix indexing is 1-based: the top-left element of matrix A is A[1,1]. Matrices
are discussed at length in chapter 13; advanced users of gretl will want to study this chapter in
detail.
Matrices have one optional attribute beyond their numerical content: they may have column names
attached, which are displayed when the matrix is printed. See the colnames function for details.
In the gretl GUI, matrices can be inspected, analysed and edited via the Icon view item under the
View menu in the main window: each currently defined matrix is represented by an icon.

11.5 Lists
As with matrices, lists merit an explication of their own (see chapter 12). Briefly, named lists can
(and should!) be used to make commands scripts less verbose and repetitious, and more easily
modifiable. Since lists are in fact lists of series ID numbers they can be used only when a dataset is
in place.
In the gretl GUI, named lists can be inspected and edited under the Data menu in the main window,
via the item Define or edit list.

11.6 Strings
String variables may be used for labeling, or for constructing commands. They are discussed in
chapter 12. They must be referenced by name; they can be defined in the absence of a dataset.
Such variables can be created and modified via the command-line in the gretl console or via script;
there is no means of editing them via the gretl GUI.

11.7 Bundles
A bundle is a container or wrapper for various sorts of objects — specifically, scalars, series,
matrices, strings and bundles. (Yes, a bundle can contain other bundles). A bundle takes the form
of a hash table or associative array: each item placed in the bundle is associated with a key string
which can used to retrieve it subsequently. We begin by explaining the mechanics of bundles then
offer some thoughts on what they are good for.
To use a bundle you must first “declare” it, as in

bundle foo
Chapter 11. Gretl data types 78

To add an object to a bundle you assign to a compound left-hand value: the name of the bundle
followed by the key string in square brackets. For example, the statement

foo["matrix1"] = m

adds an object called m (presumably a matrix) to bundle foo under the key matrix1. To get an item
out of a bundle, again use the name of the bundle followed by the bracketed key, as in

matrix bm = foo["matrix1"]

A bundle key may be given as a double-quoted string literal, as shown above, or as the name of
a pre-defined string variable. Key strings have a maximum length of 15 characters and cannot
contain spaces.
Note that the key identifying an object within a given bundle is necessarily unique. If you reuse an
existing key in a new assignment, the effect is to replace the object which was previously stored
under the given key. It is not required that the type of the replacement object is the same as that
of the original.
Also note that when you add an object to a bundle, what in fact happens is that the bundle acquires
a copy of the object. The external object retains its own identity and is unaffected if the bundled
object is replaced by another. Consider the following script fragment:

bundle foo
matrix m = I(3)
foo["mykey"] = m
scalar x = 20
foo["mykey"] = x

After the above commands are completed bundle foo does not contain a matrix under mykey, but
the original matrix m is still in good health.
To delete an object from a bundle use the delete command, as in

delete foo["mykey"]

This destroys the object associated with the key and removes the key from the hash table.
Besides adding, accessing, replacing and deleting individual items, the other operations that are
supported for bundles are union, printing and deletion. As regards union, if bundles b1 and b2 are
defined you can say

bundle b3 = b1 + b2

to create a new bundle that is the union of the two others. The algorithm is: create a new bundle
that is a copy of b1, then add any items from b2 whose keys are not already present in the new
bundle. (This means that bundle union is not commutative if the bundles have one or more key
strings in common.)
If b is a bundle and you say print b, you get a listing of the bundle’s keys along with the types of
the corresponding objects, as in

? print b
bundle b:
x (scalar)
mat (matrix)
inside (bundle)
Chapter 11. Gretl data types 79

What are bundles good for?

Bundles are unlikely to be of interest in the context of standalone gretl scripts, but they can be
very useful in the context of complex function packages where a good deal of information has to
be passed around between the component functions. Instead of using a lengthy list of individual
arguments, function A can bundle up the required data and pass it to functions B and C, where
relevant information can be extracted via a mnemonic key.
In this context bundles should be passed in “pointer” form (see chapter 10) as illustrated in the fol-
lowing trivial example, where a bundle is created at one level then filled out by a separate function.

# modification of bundle (pointer) by user function

function void fill_out_bundle (bundle *b)

b["mat"] = I(3)
b["str"] = "foo"
b["x"] = 32
end function

bundle my_bundle
fill_out_bundle(&my_bundle)

The bundle type can also be used to advantage as the return value from a packaged function, in
cases where a package writer wants to give the user the option of accessing various results. In the
gretl GUI, function packages that return a bundle are treated specially: the output window that
displays the printed results acquires a menu showing the bundled items (their names and types),
from which the user can save items of interest. For example, a function package that estimates a
model might return a bundle containing a vector of parameter estimates, a residual series and a
covariance matrix for the parameter estimates, among other possibilities.
As a refinement to support the use of bundles as a function return type, the setnote function can
be used to add a brief explanatory note to a bundled item — such notes will then be shown in the
GUI menu. This function takes three arguments: the name of a bundle, a key string, and the note.
For example

setnote(b, "vcv", "covariance matrix")

After this, the object under the key vcv in bundle b will be shown as “covariance matrix” in a GUI
menu.

11.8 The life cycle of gretl objects

Creation
The most basic way to create a new variable of any type is by declaration, where one states the type
followed by the name of the variable to create, as in

scalar x
series y
matrix A

and so forth. In that case the object in question is given a default initialization, as follows: a new
scalar has value NA (missing); a new series is filled with NAs; a new matrix is null (zero rows and
columns); a new string is empty; a new list has no members, and a new bundle is empty.
Declaration can be supplemented by a definite initialization, as in
Chapter 11. Gretl data types 80

scalar x = pi
series y = log(x)
matrix A = zeros(10,4)

With the exception of bundles (as noted above), new variables in gretl do not have to be declared
by type. The traditional way of creating a new variable in gretl was via the genr command (which is
still supported), as in

genr x = y/100

Here the type of x is left implicit and will be determined automatically depending on the context: if
y is a scalar, a series or a matrix x will inherit y’s type (otherwise an error will be generated, since
division is applicable to these types only). Moreover, the type of a new variable can be left implicit
without use of genr:

x = y/100

In “modern” gretl scripting we recommend that you state the type of a new variable explicitly.
This makes the intent clearer to a reader of the script and also guards against errors that might
otherwise be difficult to understand (i.e. a certain variable turns out to be of the wrong type for
some subsequent calculation, but you don’t notice at first because you didn’t say what type you
needed). An exception to this rule might reasonably be granted for clear and simple cases where
there’s little possibility of confusion.

Modification
Typically, the values of variables of all types are modified by assignment, using the = operator with
the name of the variable on the left and a suitable value or formula on the right:

z = normal()
x = 100 * log(y) - log(y(-1))
M = qform(a, X)

By a “suitable” value we mean one that is conformable for the type in question. A gretl variable
acquires its type when it is first created and this cannot be changed via assignment; for example, if
you have a matrix A and later want a string A, you will have to delete the matrix first.

+ One point to watch out for in gretl scripting is type conflicts having to do with the names of series brought
in from a data file. For example, in setting up a command loop (see chapter 9) it is very common to call the
loop index i. Now a loop index is a scalar (typically incremented each time round the loop). If you open
a data file that happens to contain a series named i you will get a type error (“Types not conformable for
operation”) when you try to use i as a loop index.
Although the type of an existing variable cannot be changed on the fly, gretl nonetheless tries to be
as “understanding” as possible. For example if x is a series and you say

x = 100

gretl will give the series a constant value of 100 rather than complaining that you are trying to
assign a scalar to a series. This issue is particularly relevant for the matrix type — see chapter 13
for details.
Besides using the regular assignment operator you also have the option of using an “inflected”
equals sign, as in the C programming language. This is shorthand for the case where the new value
of the variable is a function of the old value. For example,
Chapter 11. Gretl data types 81

x += 100 # in longhand: x = x + 100

x *= 100 # in longhand: x = x * 100

For scalar variables you can use a more condensed shorthand for simple increment or decrement
by 1, namely trailing ++ or -- respectively:

x = 100
x-- # x now equals 99
x++ # x now equals 100

In the case of objects holding more than one value — series, matrices and bundles — you can
modify particular values within the object using an expression within square brackets to identify
the elements to access. We have discussed this above for the bundle type and chapter 13 goes into
details for matrices. As for series, there are two ways to specify particular values for modification:
you can use a simple 1-based index, or if the dataset is a time series or panel (or if it has marker
strings that identify the observations) you can use an appropriate observation string. Such strings
are displayed by gretl when you print data with the --byobs flag. Examples:

x[13] = 100 # simple index: the 13th observation

x[1995:4] = 100 # date: quarterly time series
x[2003:08] = 100 # date: monthly time series
x["AZ"] = 100 # the observation with marker string "AZ"
x[3:15] = 100 # panel: the 15th observation for the 3rd unit

Note that with quarterly or monthly time series there is no ambiguity between a simple index
number and a date, since dates always contain a colon. With annual time-series data, however,
such ambiguity exists and it is resolved by the rule that a number in brackets is always read as a
simple index: x[1905] means the nineteen-hundred and fifth observation, not the observation for
the year 1905. You can specify a year by quotation, as in x["1905"].

Destruction
Objects of the types discussed above, with the important exception of named lists, are all destroyed
using the delete command: delete objectname.
Lists are an exception for this reason: in the context of gretl commands, a named list expands to
the ID numbers of the member series, so if you say

delete L

for L a list, the effect is to delete all the series in L; the list itself is not destroyed, but ends up
empty. To delete the list itself (without deleting the member series) you must invert the command
and use the list keyword:

list L delete
 Chapter 12

Named lists and strings

12.1 Named lists

Many gretl commands take one or more lists of series as arguments. To make this easier to handle
in the context of command scripts, and in particular within user-defined functions, gretl offers the
possibility of named lists.

Creating and modifying named lists

A named list is created using the keyword list, followed by the name of the list, an equals sign,
and an expression that forms a list. The most basic sort of expression that works in this context is
a space-separated list of variables, given either by name or by ID number. For example,

list xlist = 1 2 3 4
list reglist = income price

Note that the variables in question must be of the series type: you cannot include scalars in a
named list.
Two abbreviations are available in defining lists:

• You can use the wildcard character, “*”, to create a list of variables by name. For example,
dum* can be used to indicate all variables whose names begin with dum.

• You can use two dots to indicate a range of variables. For example income..price indicates
the set of variables whose ID numbers are greater than or equal to that of income and less
than or equal to that of price.

In addition there are two special forms:

• If you use the keyword null on the right-hand side, you get an empty list.

• If you use the keyword dataset on the right, you get a list containing all the series in the
current dataset (except the pre-defined const).

The name of the list must start with a letter, and must be composed entirely of letters, numbers
or the underscore character. The maximum length of the name is 15 characters; list names cannot
contain spaces.
Once a named list has been created, it will be “remembered” for the duration of the gretl session
(unless you delete it), and can be used in the context of any gretl command where a list of variables
is expected. One simple example is the specification of a list of regressors:

list xlist = x1 x2 x3 x4
ols y 0 xlist

To get rid of a list, you use the following syntax:

list xlist delete

82
Chapter 12. Named lists and strings 83

Be careful: delete xlist will delete the variables contained in the list, so it implies data loss
(which may not be what you want). On the other hand, list xlist delete will simply “undefine”
the xlist identifier and the variables themselves will not be affected.
Similarly, to print the names of the variables in a list you have to invert the usual print command,
as in

list xlist print

If you just say print xlist the list will be expanded and the values of all the member variables
will be printed.
Lists can be modified in various ways. To redefine an existing list altogether, use the same syntax
as for creating a list. For example

list xlist = 1 2 3
xlist = 4 5 6

After the second assignment, xlist contains just variables 4, 5 and 6.

To append or prepend variables to an existing list, we can make use of the fact that a named list
stands in for a “longhand” list. For example, we can do

list xlist = xlist 5 6 7

xlist = 9 10 xlist 11 12

Another option for appending a term (or a list) to an existing list is to use +=, as in

xlist += cpi

To drop a variable from a list, use -=:

xlist -= cpi

In most contexts where lists are used in gretl, it is expected that they do not contain any duplicated
elements. If you form a new list by simple concatenation, as in list L3 = L1 L2 (where L1 and
L2 are existing lists), it’s possible that the result may contain duplicates. To guard against this you
can form a new list as the union of two existing ones:

list L3 = L1 || L2

The result is a list that contains all the members of L1, plus any members of L2 that are not already
in L1.
In the same vein, you can construct a new list as the intersection of two existing ones:

list L3 = L1 && L2

Here L3 contains all the elements that are present in both L1 and L2.
You can also subtract one list from another:

list L3 = L1 - L2

The result contains all the elements of L1 that are not present in L2.
Chapter 12. Named lists and strings 84

Lists and matrices

Another way of forming a list is by assignment from a matrix. The matrix in question must be
interpretable as a vector containing ID numbers of (series) variables. It may be either a row or
a column vector, and each of its elements must have an integer part that is no greater than the
number of variables in the data set. For example:

matrix m = {1,2,3,4}
list L = m

The above is OK provided the data set contains at least 4 variables.

Querying a list
You can determine whether an unknown variable actually represents a list using the function
islist().

series xl1 = log(x1)

series xl2 = log(x2)
list xlogs = xl1 xl2
genr is1 = islist(xlogs)
genr is2 = islist(xl1)

The first genr command above will assign a value of 1 to is1 since xlogs is in fact a named list.
The second genr will assign 0 to is2 since xl1 is a data series, not a list.
You can also determine the number of variables or elements in a list using the function nelem().

list xlist = 1 2 3
nl = nelem(xlist)

The (scalar) variable nl will be assigned a value of 3 since xlist contains 3 members.
You can determine whether a given series is a member of a specified list using the function
inlist(), as in

scalar k = inlist(L, y)

where L is a list and y a series. The series may be specified by name or ID number. The return value
is the (1-based) position of the series in the list, or zero if the series is not present in the list.

Generating lists of transformed variables

Given a named list of variables, you are able to generate lists of transformations of these variables
using the functions log, lags, diff, ldiff, sdiff or dummify. For example

list xlist = x1 x2 x3
list lxlist = log(xlist)
list difflist = diff(xlist)

When generating a list of lags in this way, you specify the maximum lag order inside the parenthe-
ses, before the list name and separated by a comma. For example

list xlist = x1 x2 x3
list laglist = lags(2, xlist)

or
Chapter 12. Named lists and strings 85

YpcFR YpcGE YpcIT NFR NGE NIT

1997 114.9 124.6 119.3 59830.635 82034.771 56890.372

1998 115.3 122.7 120.0 60046.709 82047.195 56906.744
1999 115.0 122.4 117.8 60348.255 82100.243 56916.317
2000 115.6 118.8 117.2 60750.876 82211.508 56942.108
2001 116.0 116.9 118.1 61181.560 82349.925 56977.217
2002 116.3 115.5 112.2 61615.562 82488.495 57157.406
2003 112.1 116.9 111.0 62041.798 82534.176 57604.658
2004 110.3 116.6 106.9 62444.707 82516.260 58175.310
2005 112.4 115.1 105.1 62818.185 82469.422 58607.043
2006 111.9 114.2 103.3 63195.457 82376.451 58941.499

Table 12.1: GDP per capita and population in 3 European countries (Source: Eurostat)

scalar order = 4
list laglist = lags(order, xlist)

These commands will populate laglist with the specified number of lags of the variables in xlist.
You can give the name of a single series in place of a list as the second argument to lags: this is
equivalent to giving a list with just one member.
The dummify function creates a set of dummy variables coding for all but one of the distinct values
taken on by the original variable, which should be discrete. (The smallest value is taken as the
omitted catgory.) Like lags, this function returns a list even if the input is a single series.

Generating series from lists

Once a list is defined, gretl offers several functions that apply to the list and return a series. In most
cases, these functions also apply to single series and behave as natural extensions when applied to
a list, but this is not always the case.
For recognizing and handling missing values, Gretl offers several functions (see the Gretl Command
Reference for details). In this context, it is worth remarking that the ok() function can be used with
a list argument. For example,

list xlist = x1 x2 x3
series xok = ok(xlist)

After these commands, the series xok will have value 1 for observations where none of x1, x2, or
x3 has a missing value, and value 0 for any observations where this condition is not met.
The functions max, min, mean, sd, sum and var behave horizontally rather than vertically when their
argument is a list. For instance, the following commands

list Xlist = x1 x2 x3
series m = mean(Xlist)

produce a series m whose i-th element is the average of x1,i , x2,i and x3,i ; missing values, if any, are
implicitly discarded.
In addition, gretl provides three functions for weighted operations: wmean, wsd and wvar. Consider
as an illustration Table 12.1: the first three columns are GDP per capita for France, Germany and
Italy; columns 4 to 6 contain the population for each country. If we want to compute an aggregate
indicator of per capita GDP, all we have to do is
Chapter 12. Named lists and strings 86

list Ypc = YpcFR YpcGE YpcIT

list N = NFR NGE NIT
y = wmean(Ypc, N)

so for example

114.9 × 59830.635 + 124.6 × 82034.771 + 119.3 × 56890.372

y1996 = = 120.163
59830.635 + 82034.771 + 56890.372
See the Gretl Command Reference for more details.

12.2 Named strings

For some purposes it may be useful to save a string (that is, a sequence of characters) as a named
variable that can be reused. Versions of gretl higher than 1.6.0 offer this facility, but some of the
refinements noted below are available only in gretl 1.7.2 and higher.
To define a string variable, you can use either of two commands, string or sprintf. The string
command is simpler: you can type, for example,

string s1 = "some stuff I want to save"

string s2 = getenv("HOME")
string s3 = s1 + 11

The first field after string is the name under which the string should be saved, then comes an
equals sign, then comes a specification of the string to be saved. This can be the keyword null, to
produce an empty string, or may take any of the following forms:

• a string literal (enclosed in double quotes); or

• the name of an existing string variable; or

• a function that returns a string (see below); or

• any of the above followed by + and an integer offset.

The role of the integer offset is to use a substring of the preceding element, starting at the given
character offset. An empty string is returned if the offset is greater than the length of the string in
question.
To add to the end of an existing string you can use the operator +=, as in

string s1 = "some stuff I want to "

string s1 += "save"

or you can use the ~ operator to join two or more strings, as in

string s1 = "sweet"
string s2 = "Home, " ~ s1 ~ " home."

Note that when you define a string variable using a string literal, no characters are treated as
“special” (other than the double quotes that delimit the string). Specifically, the backslash is not
used as an escape character. So, for example,

string s = "\"
Chapter 12. Named lists and strings 87

is a valid assignment, producing a string that contains a single backslash character. If you wish to
use backslash-escapes to denote newlines, tabs, embedded double-quotes and so on, use sprintf
instead.
The sprintf command is more flexible. It works exactly as gretl’s printf command except that
the “format” string must be preceded by the name of a string variable. For example,

scalar x = 8
sprintf foo "var%d", x

To use the value of a string variable in a command, give the name of the variable preceded by the
“at” sign, @. This notation is treated as a “macro”. That is, if a sequence of characters in a gretl
command following the symbol @ is recognized as the name of a string variable, the value of that
variable is sustituted literally into the command line before the regular parsing of the command is
carried out. This is illustrated in the following interactive session:

? scalar x = 8
scalar x = 8
Generated scalar x (ID 2) = 8
? sprintf foo "var%d", x
Saved string as ’foo’
? print "@foo"
var8

Note the effect of the quotation marks in the line print "@foo". The line

? print @foo

would not print a literal “var8” as above. After pre-processing the line would read

print var8

It would therefore print the value(s) of the variable var8, if such a variable exists, or would generate
an error otherwise.
In some contexts, however, one wants to treat string variables as variables in their own right: to do
this, give the name of the variable without the leading @ symbol. This is the way to handle such
variables in the following contexts:

• When they appear among the arguments to the commands printf and sprintf.

• On the right-hand side of a string assignment.

• When they appear as an argument to the function taking a string argument.

Here is an illustration of the use of named string arguments with printf:

string vstr = "variance"

Generated string vstr
printf "vstr: %12s\n", vstr
vstr: variance

Note that vstr should not be put in quotes in this context. Similarly with

? string vstr_copy = vstr

Chapter 12. Named lists and strings 88

gretldir the gretl installation directory

workdir user’s current gretl working directory
dotdir the directory gretl uses for temporary files
gnuplot path to, or name of, the gnuplot executable
tramo path to, or name of, the tramo executable
x12a path to, or name of, the x-12-arima executable
tramodir tramo data directory
x12adir x-12-arima data directory

Table 12.2: Built-in string variables

Built-in strings
Apart from any strings that the user may define, some string variables are defined by gretl itself.
These may be useful for people writing functions that include shell commands. The built-in strings
are as shown in Table 12.2.

Reading strings from the environment

In addition, it is possible to read into gretl’s named strings, values that are defined in the external
environment. To do this you use the function getenv, which takes the name of an environment
variable as its argument. For example:

? string user = getenv("USER")

Saved string as ’user’
? string home = getenv("HOME")
Saved string as ’home’
? print "@user’s home directory is @home"
cottrell’s home directory is /home/cottrell

To check whether you got a non-empty value from a given call to getenv, you can use the function
strlen, which retrieves the length of the string, as in

? string temp = getenv("TEMP")

Saved empty string as ’temp’
? scalar x = strlen(temp)
Generated scalar x (ID 2) = 0

The function isstring returns 1 if its argument is the name of a string variable, 0 otherwise.
However, if the return is 1 the string may still be empty.
At present the getenv function can only be used on the right-hand side of a string assignment,
as in the above illustrations.

Capturing strings via the shell

If shell commands are enabled in gretl, you can capture the output from such commands using the
syntax
string stringname = $(shellcommand)
That is, you enclose a shell command in parentheses, preceded by a dollar sign.

Reading from a file into a string

You can read the content of a file into a string variable using the syntax
Chapter 12. Named lists and strings 89

string stringname = readfile(filename)

The filename field may be given as a string variable. For example

? sprintf fname "%s/QNC.rts", x12adir

Generated string fname
? string foo = readfile(fname)
Generated string foo

The above could also be accomplished using the “macro” variant of a string variable, provided it is
placed in quotation marks:
string foo = readfile("@x12adir/QNC.rts")

The strstr function

Invocation of this function takes the form
string stringname = strstr(s1, s2)
The effect is to search s1 for the first occurrence of s2. If no such occurrence is found, an empty
string is returned; otherwise the portion of s1 starting with s2 is returned. For example:

? string hw = "hello world"

Saved string as ’hw’
? string w = strstr(hw, "o")
Saved string as ’w’
? print "@w"
o world
 Chapter 13

Matrix manipulation

Together with the other two basic types of data (series and scalars), gretl offers a quite compre-
hensive array of matrix methods. This chapter illustrates the peculiarities of matrix syntax and
discusses briefly some of the more complex matrix functions. For a full listing of matrix functions
and a comprehensive account of their syntax, please refer to the Gretl Command Reference.

13.1 Creating matrices

Matrices can be created using any of these methods:

1. By direct specification of the scalar values that compose the matrix — in numerical form, by
reference to pre-existing scalar variables, or using computed values.

2. By providing a list of data series.

3. By providing a named list of series.

4. Using a formula of the same general type that is used with the genr command, whereby a new
matrix is defined in terms of existing matrices and/or scalars, or via some special functions.

To specify a matrix directly in terms of scalars, the syntax is, for example:

matrix A = { 1, 2, 3 ; 4, 5, 6 }

The matrix is defined by rows; the elements on each row are separated by commas and the rows
are separated by semi-colons. The whole expression must be wrapped in braces. Spaces within the
braces are not significant. The above expression defines a 2 × 3 matrix. Each element should be a
numerical value, the name of a scalar variable, or an expression that evaluates to a scalar. Directly
after the closing brace you can append a single quote (’) to obtain the transpose.
To specify a matrix in terms of data series the syntax is, for example,

matrix A = { x1, x2, x3 }

where the names of the variables are separated by commas. Besides names of existing variables,
you can use expressions that evaluate to a series. For example, given a series x you could do

matrix A = { x, x^2 }

Each variable occupies a column (and there can only be one variable per column). You cannot use
the semicolon as a row separator in this case: if you want the series arranged in rows, append the
transpose symbol. The range of data values included in the matrix depends on the current setting
of the sample range.
Instead of giving an explicit list of variables, you may instead provide the name of a saved list (see
Chapter 12), as in

90
Chapter 13. Matrix manipulation 91

list xlist = x1 x2 x3
matrix A = { xlist }

When you provide a named list, the data series are by default placed in columns, as is natural in an
econometric context: if you want them in rows, append the transpose symbol.
As a special case of constructing a matrix from a list of variables, you can say

matrix A = { dataset }

This builds a matrix using all the series in the current dataset, apart from the constant (variable 0).
When this dummy list is used, it must be the sole element in the matrix definition {...}. You can,
however, create a matrix that includes the constant along with all other variables using horizontal
concatenation (see below), as in

matrix A = {const}~{dataset}

By default, when you build a matrix from series that include missing values the data rows that
contain NAs are skipped. But you can modify this behavior via the command set skip_missing
off. In that case NAs are converted to NaN (“Not a Number”). In the IEEE floating-point stan-
dard, arithmetic operations involving NaN always produce NaN. Alternatively, you can take greater
control over the observations (data rows) that are included in the matrix using the “set” variable
matrix_mask, as in

set matrix_mask msk

where msk is the name of a series. Subsequent commands that form matrices from series or lists will
include only observations for which msk has non-zero (and non-missing) values. You can remove
this mask via the command set matrix_mask null.

+ Names of matrices must satisfy the same requirements as names of gretl variables in general: the name
can be no longer than 15 characters, must start with a letter, and must be composed of nothing but letters,
numbers and the underscore character.

13.2 Empty matrices

The syntax

matrix A = {}

creates an empty matrix — a matrix with zero rows and zero columns.
The main purpose of the concept of an empty matrix is to enable the user to define a starting point
for subsequent concatenation operations. For instance, if X is an already defined matrix of any size,
the commands

matrix A = {}
matrix B = A ~ X

result in a matrix B identical to X.

From an algebraic point of view, one can make sense of the idea of an empty matrix in terms of
vector spaces: if a matrix is an ordered set of vectors, then A={} is the empty set. As a consequence,
operations involving addition and multiplications don’t have any clear meaning (arguably, they have
none at all), but operations involving the cardinality of this set (that is, the dimension of the space
spanned by A) are meaningful.
Chapter 13. Matrix manipulation 92

Legal operations on empty matrices are listed in Table 13.1. (All other matrix operations gener-
ate an error when an empty matrix is given as an argument.) In line with the above interpreta-
tion, some matrix functions return an empty matrix under certain conditions: the functions diag,
vec, vech, unvech when the arguments is an empty matrix; the functions I, ones, zeros,
mnormal, muniform when one or more of the arguments is 0; and the function nullspace when
its argument has full column rank.

Function Return value

A’, transp(A) A
rows(A) 0
cols(A) 0
rank(A) 0
det(A) NA
ldet(A) NA
tr(A) NA
onenorm(A) NA
infnorm(A) NA
rcond(A) NA

Table 13.1: Valid functions on an empty matrix, A

13.3 Selecting sub-matrices

You can select sub-matrices of a given matrix using the syntax
A[rows,cols]
where rows can take any of these forms:

1. empty selects all rows

2. a single integer selects the single specified row
3. two integers separated by a colon selects a range of rows
4. the name of a matrix selects the specified rows

With regard to option 2, the integer value can be given numerically, as the name of an existing
scalar variable, or as an expression that evaluates to a scalar. With option 4, the index matrix given
in the rows field must be either p × 1 or 1 × p, and should contain integer values in the range 1 to
n, where n is the number of rows in the matrix from which the selection is to be made.
The cols specification works in the same way, mutatis mutandis. Here are some examples.

matrix B = A[1,]
matrix B = A[2:3,3:5]
matrix B = A[2,2]
matrix idx = { 1, 2, 6 }
matrix B = A[idx,]

The first example selects row 1 from matrix A; the second selects a 2×3 submatrix; the third selects
a scalar; and the fourth selects rows 1, 2, and 6 from matrix A.
If the matrix in question is n × 1 or 1 × m, it is OK to give just one index specifier and omit the
comma. For example, A[2] selects the second element of A if A is a vector. Otherwise the comma
is mandatory.
Chapter 13. Matrix manipulation 93

In addition there is a pre-defined index specification, diag, which selects the principal diagonal of
a square matrix, as in B[diag], where B is square.
You can use selections of this sort on either the right-hand side of a matrix-generating formula or
the left. Here is an example of use of a selection on the right, to extract a 2 × 2 submatrix B from a
3 × 3 matrix A:

matrix A = { 1, 2, 3; 4, 5, 6; 7, 8, 9 }
matrix B = A[1:2,2:3]

And here are examples of selection on the left. The second line below writes a 2 × 2 identity matrix
into the bottom right corner of the 3 × 3 matrix A. The fourth line replaces the diagonal of A with
1s.

matrix A = { 1, 2, 3; 4, 5, 6; 7, 8, 9 }
matrix A[2:3,2:3] = I(2)
matrix d = { 1, 1, 1 }
matrix A[diag] = d

13.4 Matrix operators

The following binary operators are available for matrices:

+ addition
- subtraction
* ordinary matrix multiplication
’ pre-multiplication by transpose
\ matrix “left division” (see below)
/ matrix “right division” (see below)
~ column-wise concatenation
| row-wise concatenation
** Kronecker product
= test for equality

In addition, the following operators (“dot” operators) apply on an element-by-element basis:

.+ .- .* ./ .^ .= .> .<

Here are explanations of the less obvious cases.

For matrix addition and subtraction, in general the two matrices have to be of the same dimensions
but an exception to this rule is granted if one of the operands is a 1 × 1 matrix or scalar. The scalar
is implicitly promoted to the status of a matrix of the correct dimensions, all of whose elements
are equal to the given scalar value. For example, if A is an m × n matrix and k a scalar, then the
commands

matrix C = A + k
matrix D = A - k

both produce m × n matrices, with elements cij = aij + k and dij = aij − k respectively.
By “pre-multiplication by transpose” we mean, for example, that

matrix C = X’Y
Chapter 13. Matrix manipulation 94

produces the product of X-transpose and Y . In effect, the expression X’Y is shorthand for X’*Y
(which is also valid).
In matrix “left division”, the statement

matrix X = A \ B

is interpreted as a request to find the matrix X that solves AX = B. If B is a square matrix, this is
in principle equivalent to A−1 B, which fails if A is singular; the numerical method employed here
is the LU decomposition. If A is a T × k matrix with T > k, then X is the least-squares solution,
X = (A0 A)−1 A0 B, which fails if A0 A is singular; the numerical method employed here is the QR
decomposition. Otherwise, the operation necessarily fails.
For matrix “right division”, as in X = A / B, X is the matrix that solves XB = A, in principle
equivalent to AB −1 .
In “dot” operations a binary operation is applied element by element; the result of this operation
is obvious if the matrices are of the same size. However, there are several other cases where such
operators may be applied. For example, if we write

matrix C = A .- B

then the result C depends on the dimensions of A and B. Let A be an m × n matrix and let B be
p × q; the result is as follows:

Case Result
Dimensions match (m = p and n = q) cij = aij − bij
A is a column vector; rows match (m = p; n = 1) cij = ai − bij
B is a column vector; rows match (m = p; q = 1) cij = aij − bi
A is a row vector; columns match (m = 1; n = q) cij = aj − bij
B is a row vector; columns match (m = p; q = 1) cij = aij − bj
A is a column vector; B is a row vector (n = 1; p = 1) cij = ai − bj
A is a row vector; B is a column vector (m = 1; q = 1) cij = aj − bi
A is a scalar (m = 1 and n = 1) cij = a − bij
B is a scalar (p = 1 and q = 1) cij = aij − b

If none of the above conditions are satisfied the result is undefined and an error is flagged.
Note that this convention makes it unnecessary, in most cases, to use diagonal matrices to perform
transformations by means of ordinary matrix multiplication: if Y = XV , where V is diagonal, it is
computationally much more convenient to obtain Y via the instruction

matrix Y = X .* v

where v is a row vector containing the diagonal of V .

In column-wise concatenation of an m×n matrix A and an m×p matrix B, the result is an m×(n+p)
matrix. That is,

matrix C = A ~ B
h i
produces C = A B .
Row-wise concatenation of an m × n matrix A and an p × n matrix B produces an (m + p) × n
matrix. That is,

matrix C = A | B
Chapter 13. Matrix manipulation 95

" #
A
produces C = .
B

13.5 Matrix–scalar operators

For matrix A and scalar k, the operators shown in Table 13.2 are available. (Addition and subtrac-
tion were discussed in section 13.4 but we include them in the table for completeness.) In addition,
for square A and integer k ≥ 0, B = A^k produces a matrix B which is A raised to the power k.

Expression Effect
matrix B = A * k bij = kaij
matrix B = A / k bij = aij /k
matrix B = k / A bij = k/aij
matrix B = A + k bij = aij + k
matrix B = A - k bij = aij − k
matrix B = k - A bij = k − aij
matrix B = A % k bij = aij modulo k

Table 13.2: Matrix–scalar operators

13.6 Matrix functions

Most of the gretl functions available for scalars and series also apply to matrices in an element-by-
element fashion, and as such their behavior should be pretty obvious. This is the case for functions
such as log, exp, sin, etc. These functions have the effects documented in relation to the genr
command. For example, if a matrix A is already defined, then

matrix B = sqrt(A)

√
generates a matrix such that bij = aij . All such functions require a single matrix as argument, or
an expression which evaluates to a single matrix.1
In this section, we review some aspects of genr functions that apply specifically to matrices. A full
account of each function is available in the Gretl Command Reference.

Matrix reshaping
In addition to the methods discussed in sections 13.1 and 13.3, a matrix can also be created by
re-arranging the elements of a pre-existing matrix. This is accomplished via the mshape function.
It takes three arguments: the input matrix, A, and the rows and columns of the target matrix, r
and c respectively. Elements are read from A and written to the target in column-major order. If A
contains fewer elements than n = r × c, they are repeated cyclically; if A has more elements, only
the first n are used.
For example:

matrix a = mnormal(2,3)
a
matrix b = mshape(a,3,1)
b
1 Note that to find the “matrix square root” you need the cholesky function (see below); moreover, the exp function

computes the exponential element by element, and therefore does not return the matrix exponential unless the matrix is
diagonal — to get the matrix exponential, use mexp.
Chapter 13. Matrix manipulation 96

Creation and I/O

colnames diag diagcat I lower mnormal
mread muniform mwrite ones rownames seq
unvech upper vec vech zeros
Shape/size/arrangement
cols dsort mreverse mshape msortby rows
selifc selifr sort trimr
Matrix algebra
cdiv cholesky cmult det eigengen eigensym
eigsolve fft ffti ginv hdprod infnorm
inv invpd ldet mexp nullspace onenorm
polroots psdroot qform qrdecomp rank rcond
svd toepsolv tr transp varsimul
Statistics/transformations
cdemean corr corrgm cov fcstats imaxc
imaxr iminc iminr irf kdensity maxc
maxr mcorr mcov mcovg meanc meanr
minc minr mlag mols mpols mrls
mxtab pergm princomp quantile ranking resample
sdc sumc sumr uniq values
Data utilities
isconst ok pshrink replace
Filters
filter kfilter ksimul ksmooth lrvar
Numerical methods
BFGSmax fdjac NRmax simann
Strings
colname
Transformations
chowlin cum lincomb

Table 13.3: Matrix functions by category

Chapter 13. Matrix manipulation 97

matrix b = mshape(a,5,2)
b

produces

? a
a

1.2323 0.99714 -0.39078

0.54363 0.43928 -0.48467

? matrix b = mshape(a,3,1)
Generated matrix b
? b
b

1.2323
0.54363
0.99714

? matrix b = mshape(a,5,2)
Replaced matrix b
? b
b

1.2323 -0.48467
0.54363 1.2323
0.99714 0.54363
0.43928 0.99714
-0.39078 0.43928

Complex multiplication and division

Gretl has no native provision for complex numbers. However, basic operations can be performed
on vectors of complex numbers by using the convention that a vector of n complex numbers is
represented as a n × 2 matrix, where the first column contains the real part and the second the
imaginary part.
Addition and subtraction are trivial; the functions cmult and cdiv compute the complex product
and division, respectively, of two input matrices, A and B, representing complex numbers. These
matrices must have the same number of rows, n, and either one or two columns. The first column
contains the real part and the second (if present) the imaginary part. The return value is an n × 2
matrix, or, if the result has no imaginary part, an n-vector.
For example, suppose you have z1 = [1 + 2i, 3 + 4i]0 and z2 = [1, i]0 :

? z1 = {1,2;3,4}
z1 = {1,2;3,4}
Generated matrix z1
? z2 = I(2)
z2 = I(2)
Generated matrix z2
? conj_z1 = z1 .* {1,-1}
conj_z1 = z1 .* {1,-1}
Generated matrix conj_z1
? eval cmult(z1,z2)
eval cmult(z1,z2)
1 2
-4 3
Chapter 13. Matrix manipulation 98

? eval cmult(z1,conj_z1)
eval cmult(z1,conj_z1)
5
25

Multiple returns and the null keyword

Some functions take one or more matrices as arguments and compute one or more matrices; these
are:

eigensym Eigen-analysis of symmetric matrix

eigengen Eigen-analysis of general matrix
mols Matrix OLS
qrdecomp QR decomposition
svd Singular value decomposition (SVD)

The general rule is: the “main” result of the function is always returned as the result proper.
Auxiliary returns, if needed, are retrieved using pre-existing matrices, which are passed to the
function as pointers (see 10.4). If such values are not needed, the pointer may be substituted with
the keyword null.
The syntax for qrdecomp, eigensym and eigengen is of the form

matrix B = func(A, &C)

The first argument, A, represents the input data, that is, the matrix whose decomposition or analysis
is required. The second argument must be either the name of an existing matrix preceded by & (to
indicate the “address” of the matrix in question), in which case an auxiliary result is written to that
matrix, or the keyword null, in which case the auxiliary result is not produced, or is discarded.
In case a non-null second argument is given, the specified matrix will be over-written with the
auxiliary result. (It is not required that the existing matrix be of the right dimensions to receive the
result.)
The function eigensym computes the eigenvalues, and optionally the right eigenvectors, of a sym-
metric n × n matrix. The eigenvalues are returned directly in a column vector of length n; if the
eigenvectors are required, they are returned in an n × n matrix. For example:

matrix V
matrix E = eigensym(M, &V)
matrix E = eigensym(M, null)

In the first case E holds the eigenvalues of M and V holds the eigenvectors. In the second, E holds
the eigenvalues but the eigenvectors are not computed.
The function eigengen computes the eigenvalues, and optionally the eigenvectors, of a general
n × n matrix. The eigenvalues are returned directly in an n × 2 matrix, the first column holding the
real components and the second column the imaginary components.
If the eigenvectors are required (that is, if the second argument to eigengen is not null), they
are returned in an n × n matrix. The column arrangement of this matrix is somewhat non-trivial:
the eigenvectors are stored in the same order as the eigenvalues, but the real eigenvectors occupy
one column, whereas complex eigenvectors take two (the real part comes first); the total num-
ber of columns is still n, because the conjugate eigenvector is skipped. Example 13.1 provides a
(hopefully) clarifying example (see also subsection 13.6).
Chapter 13. Matrix manipulation 99

Example 13.1: Complex eigenvalues and eigenvectors

set seed 34756

matrix v
A = mnormal(3,3)

/* do the eigen-analysis */
l = eigengen(A,&v)
/* eigenvalue 1 is real, 2 and 3 are complex conjugates */
print l
print v

/*
column 1 contains the first eigenvector (real)
*/

B = A*v[,1]
c = l[1,1] * v[,1]
/* B should equal c */
print B
print c

/*
columns 2:3 contain the real and imaginary parts
of eigenvector 2
*/

B = A*v[,2:3]
c = cmult(ones(3,1)*(l[2,]),v[,2:3])
/* B should equal c */
print B
print c
Chapter 13. Matrix manipulation 100

The qrdecomp function computes the QR decomposition of an m × n matrix A: A = QR, where Q

is an m × n orthogonal matrix and R is an n × n upper triangular matrix. The matrix Q is returned
directly, while R can be retrieved via the second argument. Here are two examples:

matrix R
matrix Q = qrdecomp(M, &R)
matrix Q = qrdecomp(M, null)

In the first example, the triangular R is saved as R; in the second, R is discarded. The first line
above shows an example of a “simple declaration” of a matrix: R is declared to be a matrix variable
but is not given any explicit value. In this case the variable is initialized as a 1 × 1 matrix whose
single element equals zero.
The syntax for svd is

matrix B = func(A, &C, &D)

The function svd computes all or part of the singular value decomposition of the real m × n matrix
A. Let k = min(m, n). The decomposition is
A = U ΣV 0
where U is an m × k orthogonal matrix, Σ is an k × k diagonal matrix, and V is an k × n orthogonal
matrix.2 The diagonal elements of Σ are the singular values of A; they are real and non-negative,
and are returned in descending order. The first k columns of U and V are the left and right singular
vectors of A.
The svd function returns the singular values, in a vector of length k. The left and/or right singu-
lar vectors may be obtained by supplying non-null values for the second and/or third arguments
respectively. For example:

matrix s = svd(A, &U, &V)

matrix s = svd(A, null, null)
matrix s = svd(A, null, &V)

In the first case both sets of singular vectors are obtained, in the second case only the singular
values are obtained; and in the third, the right singular vectors are obtained but U is not computed.
Please note: when the third argument is non-null, it is actually V 0 that is provided. To reconstitute
the original matrix from its SVD, one can do:

matrix s = svd(A, &U, &V)

matrix B = (U.*s)*V

Finally, the syntax for mols is

matrix B = mols(Y, X, &U)

This function returns the OLS estimates obtained by regressing the T × n matrix Y on the T × k
matrix X, that is, a k × n matrix holding (X 0 X)−1 X 0 Y . The Cholesky decomposition is used. The
matrix U , if not null, is used to store the residuals.

Reading and writing matrices from/to text files

The two functions mread and mwrite can be used for basic matrix input/output. This can be useful
to enable gretl to exchange data with other programs.
The mread function accepts one string parameter: the name of the (plain text) file from which the
matrix is to be read. The file in question must conform to the following rules:
2 This is not the only definition of the SVD: some writers define U as m × m, Σ as m × n (with k non-zero diagonal

elements) and V as n × n.
Chapter 13. Matrix manipulation 101

1. The columns must be separated by spaces or tab characters.

2. The decimal separator must be the dot “.” character.

3. The first line in the file must contain two integers, separated by a space or a tab, indicating
the number of rows and columns, respectively.

Should an error occur (such as the file being badly formatted or inaccessible), an empty matrix (see
section 13.2) is returned.
The complementary function mwrite produces text files formatted as described above. The column
separator is the tab character, so import into spreadsheets should be straightforward. Usage is
illustrated in example 13.2. Matrices stored via the mwrite command can be easily read by other
programs; the following table summarizes the appropriate commands for reading a matrix A from
a file called a.mat in some widely-used programs.3

Program Sample code

GAUSS tmp[] = load a.mat;
A = reshape(tmp[3:rows(tmp)],tmp[1],tmp[2]);
Octave fd = fopen("a.mat");
[r,c] = fscanf(fd, "%d %d", "C");
A = reshape(fscanf(fd, "%g", r*c),c,r)’;
fclose(fd);
Ox decl A = loadmat("a.mat");
R A <- as.matrix(read.table("a.mat", skip=1))

13.7 Matrix accessors

In addition to the matrix functions discussed above, various “accessor” strings allow you to create
copies of internal matrices associated with models previously estimated. These are set out in
Table 13.4.

$coeff matrix of estimated coefficients

$compan companion matrix (after VAR or VECM estimation)
$jalpha matrix α (loadings) from Johansen’s procedure
$jbeta matrix β (cointegration vectors) from Johansen’s procedure
$jvbeta covariance matrix for the unrestricted elements of β from Johansen’s procedure
$rho autoregressive coefficients for error process
$sigma residual covariance matrix
$stderr matrix of estimated standard errors
$uhat matrix of residuals
$vcv covariance matrix of parameter estimates
$vma VMA matrices in stacked form — see section 24.2 (after VAR or VECM estimation)
$yhat matrix of fitted values

Table 13.4: Matrix accessors for model data

Many of the accessors in Table 13.4 behave somewhat differently depending on the sort of model
that is referenced, as follows:
3 Matlab users may find the Octave example helpful, since the two programs are mostly compatible with one another.
Chapter 13. Matrix manipulation 102

Example 13.2: Matrix input/output via text files

nulldata 64
scalar n = 3
string f1 = "a.csv"
string f2 = "b.csv"

matrix a = mnormal(n,n)
matrix b = inv(a)

err = mwrite(a, f1)

if err != 0
fprintf "Failed to write %s\n", f1
else
err = mwrite(b, f2)
endif

if err != 0
fprintf "Failed to write %s\n", f2
else
c = mread(f1)
d = mread(f2)
a = c*d
printf "The following matrix should be an identity matrix\n"
print a
endif
Chapter 13. Matrix manipulation 103

• Single-equation models: $sigma gets a scalar (the standard error of the regression); $coeff
and $stderr get column vectors; $uhat and $yhat get series.

• System estimators: $sigma gets the cross-equation residual covariance matrix; $uhat and
$yhat get matrices with one column per equation. The format of $coeff and $stderr de-
pends on the nature of the system: for VARs and VECMs (where the matrix of regressors is
the same for all equations) these return matrices with one column per equation, but for other
system estimators they return a big column vector.

• VARs and VECMs: $vcv is not available, but X 0 X −1 (where X is the common matrix of regres-
sors) is available as $xtxinv.

If the accessors are given without any prefix, they retrieve results from the last model estimated, if
any. Alternatively, they may be prefixed with the name of a saved model plus a period (.), in which
case they retrieve results from the specified model. Here are some examples:

matrix u = $uhat
matrix b = m1.$coeff
matrix v2 = m1.$vcv[1:2,1:2]

The first command grabs the residuals from the last model; the second grabs the coefficient vector
from model m1; and the third (which uses the mechanism of sub-matrix selection described above)
grabs a portion of the covariance matrix from model m1.
If the model in question a VAR or VECM (only) $compan and $vma return the companion matrix and
the VMA matrices in stacked form, respectively (see section 24.2 for details). After a vector error
correction model is estimated via Johansen’s procedure, the matrices $jalpha and $jbeta are also
available. These have a number of columns equal to the chosen cointegration rank; therefore, the
product

matrix Pi = $jalpha * $jbeta’

returns the reduced-rank estimate of A(1). Since β is automatically identified via the Phillips nor-
malization (see section 25.5), its unrestricted elements do have a proper covariance matrix, which
can be retrieved through the $jvbeta accessor.

13.8 Namespace issues

Matrices share a common namespace with data series and scalar variables. In other words, no two
objects of any of these types can have the same name. It is an error to attempt to change the type
of an existing variable, for example:

scalar x = 3
matrix x = ones(2,2) # wrong!

It is possible, however, to delete or rename an existing variable then reuse the name for a variable
of a different type:

scalar x = 3
delete x
matrix x = ones(2,2) # OK

13.9 Creating a data series from a matrix

Section 13.1 above describes how to create a matrix from a data series or set of series. You may
sometimes wish to go in the opposite direction, that is, to copy values from a matrix into a regular
data series. The syntax for this operation is
Chapter 13. Matrix manipulation 104

series sname = mspec

where sname is the name of the series to create and mspec is the name of the matrix to copy from,
possibly followed by a matrix selection expression. Here are two examples.

series s = x
series u1 = U[,1]

It is assumed that x and U are pre-existing matrices. In the second example the series u1 is formed
from the first column of the matrix U.
For this operation to work, the matrix (or matrix selection) must be a vector with length equal to
either the full length of the current dataset, n, or the length of the current sample range, n0 . If
n0 < n then only n0 elements are drawn from the matrix; if the matrix or selection comprises n
elements, the n0 values starting at element t1 are used, where t1 represents the starting observation
of the sample range. Any values in the series that are not assigned from the matrix are set to the
missing code.

13.10 Matrices and lists

To facilitate the manipulation of named lists of variables (see Chapter 12), it is possible to convert
between matrices and lists. In section 13.1 above we mentioned the facility for creating a matrix
from a list of variables, as in

matrix M = { listname }

That formulation, with the name of the list enclosed in braces, builds a matrix whose columns hold
the variables referenced in the list. What we are now describing is a different matter: if we say

matrix M = listname

(without the braces), we get a row vector whose elements are the ID numbers of the variables in the
list. This special case of matrix generation cannot be embedded in a compound expression. The
syntax must be as shown above, namely simple assignment of a list to a matrix.
To go in the other direction, you can include a matrix on the right-hand side of an expression that
defines a list, as in

list Xl = M

where M is a matrix. The matrix must be suitable for conversion; that is, it must be a row or column
vector containing non-negative whole-number values, none of which exceeds the highest ID number
of a variable (series or scalar) in the current dataset.
Example 13.3 illustrates the use of this sort of conversion to “normalize” a list, moving the constant
(variable 0) to first position.

13.11 Deleting a matrix

To delete a matrix, just write

delete M

where M is the name of the matrix to be deleted.

Chapter 13. Matrix manipulation 105

Example 13.3: Manipulating a list

function void normalize_list (matrix *x)

# If the matrix (representing a list) contains var 0,
# but not in first position, move it to first position

if (x[1] != 0)
scalar k = cols(x)
loop for (i=2; i<=k; i++) --quiet
if (x[i] = 0)
x[i] = x[1]
x[1] = 0
break
endif
endloop
endif
end function

open data9-7
list Xl = 2 3 0 4
matrix x = Xl
normalize_list(&x)
list Xl = x

13.12 Printing a matrix

To print a matrix, the easiest way is to give the name of the matrix in question on a line by itself,
which is equivalent to using the print command:

matrix M = mnormal(100,2)
M
print M

You can get finer control on the formatting of output by using the printf command, as illustrated
in the interactive session below:

? matrix Id = I(2)
matrix Id = I(2)
Generated matrix Id
? print Id
print Id
Id (2 x 2)

1 0
0 1

? printf "%10.3f", Id
1.000 0.000
0.000 1.000

For presentation purposes you may wish to give titles to the columns of a matrix. For this you can
use the colnames function: the first argument is a matrix and the second is either a named list of
variables, whose names will be used as headings, or a string that contains as many space-separated
substrings as the matrix has columns. For example,
Chapter 13. Matrix manipulation 106

? matrix M = mnormal(3,3)
? colnames(M, "foo bar baz")
? print M
M (3 x 3)

foo bar baz

1.7102 -0.76072 0.089406
-0.99780 -1.9003 -0.25123
-0.91762 -0.39237 -1.6114

13.13 Example: OLS using matrices

Example 13.4 shows how matrix methods can be used to replicate gretl’s built-in OLS functionality.

Example 13.4: OLS via matrix methods

open data4-1
matrix X = { const, sqft }
matrix y = { price }
matrix b = invpd(X’X) * X’y
print "estimated coefficient vector"
b
matrix u = y - X*b
scalar SSR = u’u
scalar s2 = SSR / (rows(X) - rows(b))
matrix V = s2 * inv(X’X)
V
matrix se = sqrt(diag(V))
print "estimated standard errors"
se
# compare with built-in function
ols price const sqft --vcv
 Chapter 14

Cheat sheet

This chapter explains how to perform some common — and some not so common — tasks in gretl’s
scripting language. Some but not all of the techniques listed here are also available through the
graphical interface. Although the graphical interface may be more intuitive and less intimidating
at first, we encourage users to take advantage of the power of gretl’s scripting language as soon as
they feel comfortable with the program.

14.1 Dataset handling

“Weird” periodicities
Problem: You have data sampled each 3 minutes from 9am onwards; you’ll probably want to specify
the hour as 20 periods.
Solution:

setobs 20 9:1 --special

Comment: Now functions like sdiff() (“seasonal” difference) or estimation methods like seasonal
ARIMA will work as expected.

Help, my data are backwards!

Problem: Gretl expects time series data to be in chronological order (most recent observation last),
but you have imported third-party data that are in reverse order (most recent first).
Solution:

setobs 1 1 --cross-section
genr sortkey = -obs
dataset sortby sortkey
setobs 1 1950 --time-series

Comment: The first line is required only if the data currently have a time series interpretation: it
removes that interpretation, because (for fairly obvious reasons) the dataset sortby operation is
not allowed for time series data. The following two lines reverse the data, using the negative of the
built-in index variable obs. The last line is just illustrative: it establishes the data as annual time
series, starting in 1950.
If you have a dataset that is mostly the right way round, but a particular variable is wrong, you can
reverse that variable as follows:

genr x = sortby(-obs, x)

Dropping missing observations selectively

Problem: You have a dataset with many variables and want to restrict the sample to those observa-
tions for which there are no missing observations for the variables x1, x2 and x3.

107
Chapter 14. Cheat sheet 108

Solution:

list X = x1 x2 x3
smpl --no missing X

Comment: You can now save the file via a store command to preserve a subsampled version of
the dataset. Alternative solution based on the ok function, such as

list X = x1 x2 x3
genr sel = ok(X)
smpl sel --restrict

are perhaps less obvious, but more flexible. Pick your poison.

“By” operations
Problem: You have a discrete variable d and you want to run some commands (for example, estimate
a model) by splitting the sample according to the values of d.
Solution:

matrix vd = values(d)
m = rows(vd)
loop i=1..m
scalar sel = vd[i]
smpl (d=sel) --restrict --replace
ols y const x
endloop
smpl --full

Comment: The main ingredient here is a loop. You can have gretl perform as many instructions as
you want for each value of d, as long as they are allowed inside a loop. Note, however, that if all
you want is descriptive statistics, the summary command does have a --by option.

Adding a time series to a panel

Problem: You have a panel dataset (comprising observations of n indidivuals in each of T periods)
and you want to add a variable which is available in straight time-series form. For example, you
want to add annual CPI data to a panel in order to deflate nominal income figures.
In gretl a panel is represented in stacked time-series format, so in effect the task is to create a new
variable which holds n stacked copies of the original time series. Let’s say the panel comprises 500
individuals observed in the years 1990, 1995 and 2000 (n = 500, T = 3), and we have these CPI
data in the ASCII file cpi.txt:

date cpi
1990 130.658
1995 152.383
2000 172.192

What we need is for the CPI variable in the panel to repeat these three values 500 times.
Solution: Simple! With the panel dataset open in gretl,

append cpi.txt

Comment: If the length of the time series is the same as the length of the time dimension in the
panel (3 in this example), gretl will perform the stacking automatically. Rather than using the
append command you could use the “Append data” item under the File menu in the GUI program.
For this to work, your main dataset must be recognized as a panel. This can be arranged via the
setobs command or the “Dataset structure” item under the Data menu.
Chapter 14. Cheat sheet 109

14.2 Creating/modifying variables

Generating a dummy variable for a specific observation
Problem: Generate dt = 0 for all observation but one, for which dt = 1.
Solution:

genr d = (t="1984:2")

Comment: The internal variable t is used to refer to observations in string form, so if you have a
cross-section sample you may just use d = (t="123"); of course, if the dataset has data labels,
use the corresponding label. For example, if you open the dataset mrw.gdt, supplied with gretl
among the examples, a dummy variable for Italy could be generated via

genr DIta = (t="Italy")

Note that this method does not require scripting at all. In fact, you might as well use the GUI Menu
“Add/Define new variable” for the same purpose, with the same syntax.

Generating an ARMA(1,1)
Problem: Generate yt = 0.9yt−1 + εt − 0.5εt−1 , with εt ∼ NIID(0, 1).
Recommended solution:

alpha = 0.9
theta = -0.5
series y = filter(normal(), {1, theta}, alpha)

“Bread and butter” solution:

alpha = 0.9
theta = -0.5
series e = normal()
series y = 0
series y = alpha * y(-1) + e + theta * e(-1)

Comment: The filter function is specifically designed for this purpose so in most cases you’ll
want to take advantage of its speed and flexibility. That said, in some cases you may want to
generate the series in a manner which is more transparent (maybe for teaching purposes).
In the second solution, the statement series y = 0 is necessary because the next statement eval-
uates y recursively, so y[1] must be set. Note that you must use the keyword series here instead
of writing genr y = 0 or simply y = 0, to ensure that y is a series and not a scalar.

Recoding a variable
Problem: You want to recode a variable by classes. For example, you have the age of a sample of
individuals (xi ) and you need to compute age classes (yi ) as

yi = 1 for xi < 18
yi = 2 for 18 ≤ xi < 65
yi = 3 for xi ≥ 65

Solution:

series y = 1 + (x >= 18) + (x >= 65)

Chapter 14. Cheat sheet 110

Comment: True and false expressions are evaluated as 1 and 0 respectively, so they can be ma-
nipulated algebraically as any other number. The same result could also be achieved by using the
conditional assignment operator (see below), but in most cases it would probably lead to more
convoluted constructs.

Conditional assignment
Problem: Generate yt via the following rule:
(
xt for dt > a
yt =
zt for dt ≤ a

Solution:

series y = (d > a) ? x : z

Comment: There are several alternatives to the one presented above. One is a brute force solution
using loops. Another one, more efficient but still suboptimal, would be

series y = (d>a)*x + (d<=a)*z

However, the ternary conditional assignment operator is not only the most numerically efficient
way to accomplish what we want, it is also remarkably transparent to read when one gets used to
it. Some readers may find it helpful to note that the conditional assignment operator works exactly
the same way as the =IF() function in spreadsheets.

Generating a time index for panel datasets

Problem: Gretl has a $unit accessor, but not the equivalent for time. What should I use?
Solution:

series x = time

Comment: The special construct genr time and its variants are aware of whether a dataset is a
panel.

14.3 Neat tricks

Interaction dummies
Problem: You want to estimate the model yi = xi β1 + zi β2 + di β3 + (di · zi )β4 + εt , where di is a
dummy variable while xi and zi are vectors of explanatory variables.
Solution:

list X = x1 x2 x3
list Z = z1 z2
list dZ = null
loop foreach i Z
series d$i = d * $i
list dZ = dZ d$i
endloop

ols y X Z d dZ

Comment: It’s amazing what string substitution can do for you, isn’t it?
Chapter 14. Cheat sheet 111

Realized volatility
Given data by the minute, you want to compute the “realized volatility” for the hour as
Problem: P
1 60 2
RVt = 60 τ=1 yt:τ . Imagine your sample starts at time 1:1.

Solution:

smpl --full
genr time
genr minute = int(time/60) + 1
genr second = time % 60
setobs minute second --panel
genr rv = psd(y)^2
setobs 1 1
smpl second=1 --restrict
store foo rv

Comment: Here we trick gretl into thinking that our dataset is a panel dataset, where the minutes
are the “units” and the seconds are the “time”; this way, we can take advantage of the special
function psd(), panel standard deviation. Then we simply drop all observations but one per minute
and save the resulting data (store foo rv translates as “store in the gretl datafile foo.gdt the
series rv”).

Looping over two paired lists

Problem: Suppose you have two lists with the same number of elements, and you want to apply
some command to corresponding elements over a loop.
Solution:

list L1 = a b c
list L2 = x y z

k1 = 1
loop foreach i L1 --quiet
k2 = 1
loop foreach j L2 --quiet
if k1=k2
ols $i 0 $j
endif
k2++
endloop
k1++
endloop

Comment: The simplest way to achieve the result is to loop over all possible combinations and
filter out the unneeded ones via an if condition, as above. That said, in some cases variable names
can help. For example, if

list Lx = x1 x2 x3
list Ly = y1 y2 y3

looping over the integers is quite intuitive and certainly more elegant:

loop i=1..3
ols y$i const x$i
endloop
 Part II

Econometric methods

112
 Chapter 15

Robust covariance matrix estimation

15.1 Introduction
Consider (once again) the linear regression model

y = Xβ + u (15.1)

where y and u are T -vectors, X is a T × k matrix of regressors, and β is a k-vector of parameters.

As is well known, the estimator of β given by Ordinary Least Squares (OLS) is

β̂ = (X 0 X)−1 X 0 y (15.2)

If the condition E(u|X) = 0 is satisfied, this is an unbiased estimator; under somewhat weaker
conditions the estimator is biased but consistent. It is straightforward to show that when the OLS
estimator is unbiased (that is, when E(β̂ − β) = 0), its variance is
 
Var(β̂) = E (β̂ − β)(β̂ − β)0 = (X 0 X)−1 X 0 ΩX(X 0 X)−1 (15.3)

where Ω = E(uu0 ) is the covariance matrix of the error terms.

Under the assumption that the error terms are independently and identically distributed (iid) we
can write Ω = σ 2 I, where σ 2 is the (common) variance of the errors (and the covariances are zero).
In that case (15.3) simplifies to the “classical” formula,

Var(β̂) = σ 2 (X 0 X)−1 (15.4)

If the iid assumption is not satisfied, two things follow. First, it is possible in principle to construct
a more efficient estimator than OLS — for instance some sort of Feasible Generalized Least Squares
(FGLS). Second, the simple “classical” formula for the variance of the least squares estimator is no
longer correct, and hence the conventional OLS standard errors — which are just the square roots
of the diagonal elements of the matrix defined by (15.4) — do not provide valid means of statistical
inference.
In the recent history of econometrics there are broadly two approaches to the problem of non-
iid errors. The “traditional” approach is to use an FGLS estimator. For example, if the departure
from the iid condition takes the form of time-series dependence, and if one believes that this
could be modeled as a case of first-order autocorrelation, one might employ an AR(1) estimation
method such as Cochrane–Orcutt, Hildreth–Lu, or Prais–Winsten. If the problem is that the error
variance is non-constant across observations, one might estimate the variance as a function of the
independent variables and then perform weighted least squares, using as weights the reciprocals
of the estimated variances.
While these methods are still in use, an alternative approach has found increasing favor: that
is, use OLS but compute standard errors (or more generally, covariance matrices) that are robust
with respect to deviations from the iid assumption. This is typically combined with an emphasis on
using large datasets — large enough that the researcher can place some reliance on the (asymptotic)
consistency property of OLS. This approach has been enabled by the availability of cheap computing
power. The computation of robust standard errors and the handling of very large datasets were
daunting tasks at one time, but now they are unproblematic. The other point favoring the newer
methodology is that while FGLS offers an efficiency advantage in principle, it often involves making

113
Chapter 15. Robust covariance matrix estimation 114

additional statistical assumptions which may or may not be justified, which may not be easy to test
rigorously, and which may threaten the consistency of the estimator — for example, the “common
factor restriction” that is implied by traditional FGLS “corrections” for autocorrelated errors.
James Stock and Mark Watson’s Introduction to Econometrics illustrates this approach at the level of
undergraduate instruction: many of the datasets they use comprise thousands or tens of thousands
of observations; FGLS is downplayed; and robust standard errors are reported as a matter of course.
In fact, the discussion of the classical standard errors (labeled “homoskedasticity-only”) is confined
to an Appendix.
Against this background it may be useful to set out and discuss all the various options offered
by gretl in respect of robust covariance matrix estimation. The first point to notice is that gretl
produces “classical” standard errors by default (in all cases apart from GMM estimation). In script
mode you can get robust standard errors by appending the --robust flag to estimation commands.
In the GUI program the model specification dialog usually contains a “Robust standard errors”
check box, along with a “configure” button that is activated when the box is checked. The configure
button takes you to a configuration dialog (which can also be reached from the main menu bar:
Tools → Preferences → General → HCCME). There you can select from a set of possible robust
estimation variants, and can also choose to make robust estimation the default.
The specifics of the available options depend on the nature of the data under consideration —
cross-sectional, time series or panel — and also to some extent the choice of estimator. (Although
we introduced robust standard errors in the context of OLS above, they may be used in conjunction
with other estimators too.) The following three sections of this chapter deal with matters that are
specific to the three sorts of data just mentioned. Note that additional details regarding covariance
matrix estimation in the context of GMM are given in chapter 20.
We close this introduction with a brief statement of what “robust standard errors” can and cannot
achieve. They can provide for asymptotically valid statistical inference in models that are basically
correctly specified, but in which the errors are not iid. The “asymptotic” part means that they
may be of little use in small samples. The “correct specification” part means that they are not a
magic bullet: if the error term is correlated with the regressors, so that the parameter estimates
themselves are biased and inconsistent, robust standard errors will not save the day.

15.2 Cross-sectional data and the HCCME

With cross-sectional data, the most likely departure from iid errors is heteroskedasticity (non-
constant variance).1 In some cases one may be able to arrive at a judgment regarding the likely
form of the heteroskedasticity, and hence to apply a specific correction. The more common case,
however, is where the heteroskedasticity is of unknown form. We seek an estimator of the covari-
ance matrix of the parameter estimates that retains its validity, at least asymptotically, in face of
unspecified heteroskedasticity. It is not obvious, a priori, that this should be possible, but White
(1980) showed that
d h (β̂) = (X 0 X)−1 X 0 Ω̂X(X 0 X)−1
Var (15.5)
does the trick. (As usual in statistics, we need to say “under certain conditions”, but the conditions
are not very restrictive.) Ω̂ is in this context a diagonal matrix, whose non-zero elements may be
estimated using squared OLS residuals. White referred to (15.5) as a heteroskedasticity-consistent
covariance matrix estimator (HCCME).
Davidson and MacKinnon (2004, chapter 5) offer a useful discussion of several variants on White’s
HCCME theme. They refer to the original variant of (15.5) — in which the diagonal elements of Ω̂
are estimated directly by the squared OLS residuals, û2t — as HC0 . (The associated standard errors
are often called “White’s standard errors”.) The various refinements of White’s proposal share a
common point of departure, namely the idea that the squared OLS residuals are likely to be “too
1 In some specialized contexts spatial autocorrelation may be an issue. Gretl does not have any built-in methods to

handle this and we will not discuss it here.

Chapter 15. Robust covariance matrix estimation 115

small” on average. This point is quite intuitive. The OLS parameter estimates, β̂, satisfy by design
the criterion that the sum of squared residuals,
X X 2
û2t = yt − Xt β̂

is minimized for given X and y. Suppose that β̂ ≠ β. This is almost certain to be the case: even if
OLS is not biased, it would be a miracle if the β̂ calculated from any finite sample were
P exactly equal
to β. But in that case thePsum of squares of the true, unobserved errors, u2t = (yt − Xt β)2 is
P

bound to be greater than û2t . The elaborated variants on HC0 take this point on board as follows:

• HC1 : Applies a degrees-of-freedom correction, multiplying the HC0 matrix by T /(T − k).

• HC2 : Instead of using û2t for the diagonal elements of Ω̂, uses û2t /(1 − ht ), where ht =
Xt (X 0 X)−1 Xt0 , the t th diagonal element of the projection matrix, P , which has the property
that P · y = ŷ. The relevance of ht is that if the variance of all the ut is σ 2 , the expectation
of û2t is σ 2 (1 − ht ), or in other words, the ratio û2t /(1 − ht ) has expectation σ 2 . As Davidson
and MacKinnon show, 0 ≤ ht < 1 for all t, so this adjustment cannot reduce the the diagonal
elements of Ω̂ and in general revises them upward.

• HC3 : Uses û2t /(1 − ht )2 . The additional factor of (1 − ht ) in the denominator, relative to
HC2 , may be justified on the grounds that observations with large variances tend to exert a
lot of influence on the OLS estimates, so that the corresponding residuals tend to be under-
estimated. See Davidson and MacKinnon for a fuller explanation.

The relative merits of these variants have been explored by means of both simulations and the-
oretical analysis. Unfortunately there is not a clear consensus on which is “best”. Davidson and
MacKinnon argue that the original HC0 is likely to perform worse than the others; nonetheless,
“White’s standard errors” are reported more often than the more sophisticated variants and there-
fore, for reasons of comparability, HC0 is the default HCCME in gretl.
If you wish to use HC1 , HC2 or HC3 you can arrange for this in either of two ways. In script mode,
you can do, for example,

set hc_version 2

In the GUI program you can go to the HCCME configuration dialog, as noted above, and choose any
of these variants to be the default.

15.3 Time series data and HAC covariance matrices

Heteroskedasticity may be an issue with time series data too, but it is unlikely to be the only, or
even the primary, concern.
One form of heteroskedasticity is common in macroeconomic time series, but is fairly easily dealt
with. That is, in the case of strongly trending series such as Gross Domestic Product, aggregate
consumption, aggregate investment, and so on, higher levels of the variable in question are likely
to be associated with higher variability in absolute terms. The obvious “fix”, employed in many
macroeconometric studies, is to use the logs of such series rather than the raw levels. Provided the
proportional variability of such series remains roughly constant over time, the log transformation
is effective.
Other forms of heteroskedasticity may resist the log transformation, but may demand a special
treatment distinct from the calculation of robust standard errors. We have in mind here autore-
gressive conditional heteroskedasticity, for example in the behavior of asset prices, where large
disturbances to the market may usher in periods of increased volatility. Such phenomena call for
specific estimation strategies, such as GARCH (see chapter 23).
Chapter 15. Robust covariance matrix estimation 116

Despite the points made above, some residual degree of heteroskedasticity may be present in time
series data: the key point is that in most cases it is likely to be combined with serial correlation
(autocorrelation), hence demanding a special treatment. In White’s approach, Ω̂, the estimated
covariance matrix of the ut , remains conveniently diagonal: the variances, E(u2t ), may differ by
t but the covariances, E(ut us ), are all zero. Autocorrelation in time series data means that at
least some of the the off-diagonal elements of Ω̂ should be non-zero. This introduces a substantial
complication and requires another piece of terminology; estimates of the covariance matrix that
are asymptotically valid in face of both heteroskedasticity and autocorrelation of the error process
are termed HAC (heteroskedasticity and autocorrelation consistent).
The issue of HAC estimation is treated in more technical terms in chapter 20. Here we try to
convey some of the intuition at a more basic level. We begin with a general comment: residual
autocorrelation is not so much a property of the data, as a symptom of an inadequate model. Data
may be persistent though time, and if we fit a model that does not take this aspect into account
properly, we end up with a model with autocorrelated disturbances. Conversely, it is often possible
to mitigate or even eliminate the problem of autocorrelation by including relevant lagged variables
in a time series model, or in other words, by specifying the dynamics of the model more fully. HAC
estimation should not be seen as the first resort in dealing with an autocorrelated error process.
That said, the “obvious” extension of White’s HCCME to the case of autocorrelated errors would
seem to be this: estimate the off-diagonal elements of Ω̂ (that is, the autocovariances, E(ut us ))
using, once again, the appropriate OLS residuals: ω̂ts = ût ûs . This is basically right, but demands
an important amendment. We seek a consistent estimator, one that converges towards the true Ω
as the sample size tends towards infinity. This can’t work if we allow unbounded serial depen-
dence. Bigger samples will enable us to estimate more of the true ωts elements (that is, for t and
s more widely separated in time) but will not contribute ever-increasing information regarding the
maximally separated ωts pairs, since the maximal separation itself grows with the sample size.
To ensure consistency, we have to confine our attention to processes exhibiting temporally limited
dependence, or in other words cut off the computation of the ω̂ts values at some maximum value
of p = t − s (where p is treated as an increasing function of the sample size, T , although it cannot
increase in proportion to T ).
The simplest variant of this idea is to truncate the computation at some finite lag order p, where
p grows as, say, T 1/4 . The trouble with this is that the resulting Ω̂ may not be a positive definite
matrix. In practical terms, we may end up with negative estimated variances. One solution to this
problem is offered by The Newey–West estimator (Newey and West, 1987), which assigns declining
weights to the sample autocovariances as the temporal separation increases.
To understand this point it is helpful to look more closely at the covariance matrix given in (15.5),
namely,
(X 0 X)−1 (X 0 Ω̂X)(X 0 X)−1
This is known as a “sandwich” estimator. The bread, which appears on both sides, is (X 0 X)−1 .
This is a k × k matrix, and is also the key ingredient in the computation of the classical covariance
matrix. The filling in the sandwich is

Σ̂ = X0 Ω̂ X
(k×k) (k×T ) (T ×T ) (T ×k)

Since Ω = E(uu0 ), the matrix being estimated here can also be written as

Σ = E(X 0 u u0 X)

which expresses Σ as the long-run covariance of the random k-vector X 0 u.

From a computational point of view, it is not necessary or desirable to store the (potentially very
large) T × T matrix Ω̂ as such. Rather, one computes the sandwich filling by summation as
p  
X
Σ̂ = Γ̂ (0) + wj Γ̂ (j) + Γ̂ 0 (j)
j=1
Chapter 15. Robust covariance matrix estimation 117

where the k × k sample autocovariance matrix Γ̂ (j), for j ≥ 0, is given by

T
1 X
Γ̂ (j) = ût ût−j Xt0 Xt−j
T t=j+1

and wj is the weight given to the autocovariance at lag j > 0.

This leaves two questions. How exactly do we determine the maximum lag length or “bandwidth”,
p, of the HAC estimator? And how exactly are the weights wj to be determined? We will return to
the (difficult) question of the bandwidth shortly. As regards the weights, Gretl offers three variants.
The default is the Bartlett kernel, as used by Newey and West. This sets

 1− j j≤p
p+1
wj =
 0 j>p

so the weights decline linearly as j increases. The other two options are the Parzen kernel and the
Quadratic Spectral (QS) kernel. For the Parzen kernel,
3

2
 1 − 6aj + 6aj 0 ≤ aj ≤ 0.5


wj = 2(1 − aj )3 0.5 < aj ≤ 1

0 a >1


j

where aj = j/(p + 1), and for the QS kernel,

!
25 sin mj
wj = − cos mj
12π 2 d2j mj

where dj = j/p and mj = 6π di /5.

Figure 15.1 shows the weights generated by these kernels, for p = 4 and j = 1 to 9.

Figure 15.1: Three HAC kernels

Bartlett Parzen QS

In gretl you select the kernel using the set command with the hac_kernel parameter:

set hac_kernel parzen

set hac_kernel qs
set hac_kernel bartlett

Selecting the HAC bandwidth

The asymptotic theory developed by Newey, West and others tells us in general terms how the
HAC bandwidth, p, should grow with the sample size, T — that is, p should grow in proportion
to some fractional power of T . Unfortunately this is of little help to the applied econometrician,
working with a given dataset of fixed size. Various rules of thumb have been suggested, and gretl
implements two such. The default is p = 0.75T 1/3 , as recommended by Stock and Watson (2003).
An alternative is p = 4(T /100)2/9 , as in Wooldridge (2002b). In each case one takes the integer
part of the result. These variants are labeled nw1 and nw2 respectively, in the context of the set
command with the hac_lag parameter. That is, you can switch to the version given by Wooldridge
with
Chapter 15. Robust covariance matrix estimation 118

set hac_lag nw2

As shown in Table 15.1 the choice between nw1 and nw2 does not make a great deal of difference.

T p (nw1) p (nw2)
50 2 3
100 3 4
150 3 4
200 4 4
300 5 5
400 5 5

Table 15.1: HAC bandwidth: two rules of thumb

You also have the option of specifying a fixed numerical value for p, as in

set hac_lag 6

In addition you can set a distinct bandwidth for use with the Quadratic Spectral kernel (since this
need not be an integer). For example,

set qs_bandwidth 3.5

Prewhitening and data-based bandwidth selection

An alternative approach is to deal with residual autocorrelation by attacking the problem from two
sides. The intuition behind the technique known as VAR prewhitening (Andrews and Monahan,
1992) can be illustrated by a simple example. Let xt be a sequence of first-order autocorrelated
random variables
xt = ρxt−1 + ut
The long-run variance of xt can be shown to be

VLR (ut )
VLR (xt ) =
(1 − ρ)2

In most cases, ut is likely to be less autocorrelated than xt , so a smaller bandwidth should suffice.
Estimation of VLR (xt ) can therefore proceed in three steps: (1) estimate ρ; (2) obtain a HAC estimate
of ût = xt − ρ̂xt−1 ; and (3) divide the result by (1 − ρ)2 .
The application of the above concept to our problem implies estimating a finite-order Vector Au-
toregression (VAR) on the vector variables ξt = Xt ût . In general, the VAR can be of any order, but
in most cases 1 is sufficient; the aim is not to build a watertight model for ξt , but just to “mop up”
a substantial part of the autocorrelation. Hence, the following VAR is estimated

ξt = Aξt−1 + εt

Then an estimate of the matrix X 0 ΩX can be recovered via

(I − Â)−1 Σ̂ε (I − Â0 )−1

where Σ̂ε is any HAC estimator, applied to the VAR residuals.

You can ask for prewhitening in gretl using

set hac_prewhiten on
Chapter 15. Robust covariance matrix estimation 119

There is at present no mechanism for specifying an order other than 1 for the initial VAR.
A further refinement is available in this context, namely data-based bandwidth selection. It makes
intuitive sense that the HAC bandwidth should not simply be based on the size of the sample,
but should somehow take into account the time-series properties of the data (and also the kernel
chosen). A nonparametric method for doing this was proposed by Newey and West (1994); a good
concise account of the method is given in Hall (2005). This option can be invoked in gretl via

set hac_lag nw3

This option is the default when prewhitening is selected, but you can override it by giving a specific
numerical value for hac_lag.
Even the Newey–West data-based method does not fully pin down the bandwidth for any particular
sample. The first step involves calculating a series of residual covariances. The length of this series
is given as a function of the sample size, but only up to a scalar multiple — for example, it is given
as O(T 2/9 ) for the Bartlett kernel. Gretl uses an implied multiple of 1.

VARs: a special case

A well-specified vector autoregression (VAR) will generally include enough lags of the dependent
variables to obviate the problem of residual autocorrelation, in which case HAC estimation is re-
dundant — although there may still be a need to correct for heteroskedasticity. For that reason
plain HCCME, and not HAC, is the default when the --robust flag is given in the context of the var
command. However, if for some reason you need HAC you can force the issue by giving the option
--robust-hac.

15.4 Special issues with panel data

Since panel data have both a time-series and a cross-sectional dimension one might expect that, in
general, robust estimation of the covariance matrix would require handling both heteroskedasticity
and autocorrelation (the HAC approach). In addition, some special features of panel data require
attention.

• The variance of the error term may differ across the cross-sectional units.

• The covariance of the errors across the units may be non-zero in each time period.

• If the “between” variation is not removed, the errors may exhibit autocorrelation, not in the
usual time-series sense but in the sense that the mean error for unit i may differ from that of
unit j. (This is particularly relevant when estimation is by pooled OLS.)

Gretl currently offers two robust covariance matrix estimators specifically for panel data. These are
available for models estimated via fixed effects, pooled OLS, and pooled two-stage least squares.
The default robust estimator is that suggested by Arellano (2003), which is HAC provided the panel
is of the “large n, small T ” variety (that is, many units are observed in relatively few periods). The
Arellano estimator is  
n
0

−1 X 0 0

−1
Σ̂A = X X  Xi ûi ûi Xi  X 0 X
i=1

where X is the matrix of regressors (with the group means subtracted, in the case of fixed effects) ûi
denotes the vector of residuals for unit i, and n is the number of cross-sectional units.2 Cameron
and Trivedi (2005) make a strong case for using this estimator; they note that the ordinary White
HCCME can produce misleadingly small standard errors in the panel context because it fails to take
2 This variance estimator is also known as the “clustered (over entities)” estimator.
Chapter 15. Robust covariance matrix estimation 120

autocorrelation into account. In addition Stock and Watson (2008) show that the White HCCME is
inconsistent in the fixed-effects panel context for fixed T > 2.
In cases where autocorrelation is not an issue the estimator proposed by Beck and Katz (1995)
and discussed by Greene (2003, chapter 13) may be appropriate. This estimator, which takes into
account contemporaneous correlation across the units and heteroskedasticity by unit, is
 
n X
n
−1
−1
X
Σ̂BK = X 0 X σ̂ij Xi0 Xj  X 0 X



i=1 j=1

The covariances σ̂ij are estimated via

û0i ûj
σ̂ij =
T
where T is the length of the time series for each unit. Beck and Katz call the associated standard
errors “Panel-Corrected Standard Errors” (PCSE). This estimator can be invoked in gretl via the
command

set pcse on

The Arellano default can be re-established via

set pcse off

(Note that regardless of the pcse setting, the robust estimator is not used unless the --robust flag
is given, or the “Robust” box is checked in the GUI program.)

15.5 The cluster-robust estimator

One further variance estimator is available in gretl, namely the “cluster-robust” estimator. This may
be appropriate (for cross-sectional data, mostly) when the observations naturally fall into groups or
clusters, and one suspects that the error term may exhibit dependency within the clusters and/or
have a variance that differs across clusters. Such clusters may be binary (e.g. employed versus
unemployed workers), categorical with several values (e.g. products grouped by manufacturer) or
ordinal (e.g. individuals with low, middle or high education levels).
For linear regression models estimated via least squares the cluster estimator is defined as
 
m
0

−1 X 0 0

−1
Σ̂C = X X  Xj ûj ûj Xj  X 0 X
j=1

where m denotes the number of clusters, and Xj and ûj denote, respectively, the matrix of regres-
sors and the vector of residuals that fall within cluster j. As noted above, the Arellano variance
estimator for panel data models is a special case of this, where the clustering is by panel unit.
For models estimated by the method of Maximum Likelihood (in which case the standard variance
estimator is the inverse of the negative Hessian, H), the cluster estimator is
 
m
X
−1  0
Σ̂C = H Gj Gj  H −1
j=1

where Gj is the sum of the “score” (that is, the derivative of the loglikelihood with respect to the
parameter estimates) across the observations falling within cluster j.
It is common to apply a degrees of freedom adjustment to these estimators (otherwise the variance
may appear misleading small in comparison with other estimators, if the number of clusters is
small). In the least squares case the factor is (m/(m − 1)) × (n − 1)/(n − k), where n is the total
number of observations and k is the number of parameters estimated; in the case of ML estimation
the factor is just m/(m − 1).
Chapter 15. Robust covariance matrix estimation 121

Availability and syntax

The cluster-robust estimator is currently available for models estimated via OLS and TSLS, and also
for most ML estimators other than those specialized for time-series data: binary logit and probit,
ordered logit and probit, multinomial logit, Tobit, interval regression, biprobit, count models and
duration models. In all cases the syntax is the same: you give the option flag --cluster= followed
by the name of the series to be used to define the clusters, as in

ols y 0 x1 x2 --cluster=cvar

The specified clustering variable must (a) be defined (not missing) at all observations used in esti-
mating the model and (b) take on at least two distinct values over the estimation range. The clusters
are defined as sets of observations having a common value for the clustering variable. It is generally
expected that the number of clusters is substantially less than the total number of observations.
 Chapter 16

Panel data

16.1 Estimation of panel models

Pooled Ordinary Least Squares
The simplest estimator for panel data is pooled OLS. In most cases this is unlikely to be adequate,
but it provides a baseline for comparison with more complex estimators.
If you estimate a model on panel data using OLS an additional test item becomes available. In the
GUI model window this is the item “panel diagnostics” under the Tests menu; the script counterpart
is the hausman command.
To take advantage of this test, you should specify a model without any dummy variables represent-
ing cross-sectional units. The test compares pooled OLS against the principal alternatives, the fixed
effects and random effects models. These alternatives are explained in the following section.

The fixed and random effects models

In gretl version 1.6.0 and higher, the fixed and random effects models for panel data can be es-
timated in their own right. In the graphical interface these options are found under the menu
item “Model/Panel/Fixed and random effects”. In the command-line interface one uses the panel
command, with or without the --random-effects option.
This section explains the nature of these models and comments on their estimation via gretl.
The pooled OLS specification may be written as
yit = Xit β + uit (16.1)
where yit is the observation on the dependent variable for cross-sectional unit i in period t, Xit
is a 1 × k vector of independent variables observed for unit i in period t, β is a k × 1 vector of
parameters, and uit is an error or disturbance term specific to unit i in period t.
The fixed and random effects models have in common that they decompose the unitary pooled
error term, uit . For the fixed effects model we write uit = αi + εit , yielding
yit = Xit β + αi + εit (16.2)
That is, we decompose uit into a unit-specific and time-invariant component, αi , and an observation-
specific error, εit .1 The αi s are then treated as fixed parameters (in effect, unit-specific y-intercepts),
which are to be estimated. This can be done by including a dummy variable for each cross-sectional
unit (and suppressing the global constant). This is sometimes called the Least Squares Dummy Vari-
ables (LSDV) method. Alternatively, one can subtract the group mean from each of variables and
estimate a model without a constant. In the latter case the dependent variable may be written as
ỹit = yit − ȳi
The “group mean”, ȳi , is defined as
Ti
1 X
ȳi = yit
Ti t=1
1 It is possible to break a third component out of u , namely w , a shock that is time-specific but common to all the
it t
units in a given period. In the interest of simplicity we do not pursue that option here.

122
Chapter 16. Panel data 123

where Ti is the number of observations for unit i. An exactly analogous formulation applies to the
independent variables. Given parameter estimates, β̂, obtained using such de-meaned data we can
recover estimates of the αi s using
Ti
1 X 
α̂i = yit − Xit β̂
Ti t=1

These two methods (LSDV, and using de-meaned data) are numerically equivalent. Gretl takes the
approach of de-meaning the data. If you have a small number of cross-sectional units, a large num-
ber of time-series observations per unit, and a large number of regressors, it is more economical
in terms of computer memory to use LSDV. If need be you can easily implement this manually. For
example,

genr unitdum
ols y x du_*

(See Chapter 5 for details on unitdum).

The α̂i estimates are not printed as part of the standard model output in gretl (there may be a large
number of these, and typically they are not of much inherent interest). However you can retrieve
them after estimation of the fixed effects model if you wish. In the graphical interface, go to the
“Save” menu in the model window and select “per-unit constants”. In command-line mode, you can
do genr newname = $ahat, where newname is the name you want to give the series.
For the random effects model we write uit = vi + εit , so the model becomes

yit = Xit β + vi + εit (16.3)

In contrast to the fixed effects model, the vi s are not treated as fixed parameters, but as random
drawings from a given probability distribution.
The celebrated Gauss–Markov theorem, according to which OLS is the best linear unbiased esti-
mator (BLUE), depends on the assumption that the error term is independently and identically
distributed (IID). In the panel context, the IID assumption means that E(u2it ), in relation to equa-
tion 16.1, equals a constant, σu2 , for all i and t, while the covariance E(uis uit ) equals zero for all
s ≠ t and the covariance E(ujt uit ) equals zero for all j ≠ i.
If these assumptions are not met — and they are unlikely to be met in the context of panel data
— OLS is not the most efficient estimator. Greater efficiency may be gained using generalized least
squares (GLS), taking into account the covariance structure of the error term.
Consider observations on a given unit i at two different times s and t. From the hypotheses above
it can be worked out that Var(uis ) = Var(uit ) = σv2 + σε2 , while the covariance between uis and uit
is given by E(uis uit ) = σv2 .
In matrix notation, we may group all the Ti observations for unit i into the vector yi and write it as

yi = Xi β + ui (16.4)
The vector ui , which includes all the disturbances for individual i, has a variance–covariance matrix
given by
Var(ui ) = Σi = σε2 I + σv2 J (16.5)
where J is a square matrix with all elements equal to 1. It can be shown that the matrix
θi
Ki = I − J,
Ti
r
σε2
where θi = 1 − σε2 +Ti σv2
, has the property

Ki ΣKi0 = σε2 I
Chapter 16. Panel data 124

It follows that the transformed system

Ki yi = Ki Xi β + Ki ui (16.6)

satisfies the Gauss–Markov conditions, and OLS estimation of (16.6) provides efficient inference.
But since
Ki yi = yi − θi ȳi
GLS estimation is equivalent to OLS using “quasi-demeaned” variables; that is, variables from which
we subtract a fraction θ of their average.2 Notice that for σε2 → 0, θ → 1, while for σv2 → 0, θ → 0.
This means that if all the variance is attributable to the individual effects, then the fixed effects
estimator is optimal; if, on the other hand, individual effects are negligible, then pooled OLS turns
out, unsurprisingly, to be the optimal estimator.
To implement the GLS approach we need to calculate θ, which in turn requires estimates of the
variances σε2 and σv2 . (These are often referred to as the “within” and “between” variances re-
spectively, since the former refers to variation within each cross-sectional unit and the latter to
variation between the units). Several means of estimating these magnitudes have been suggested
in the literature (see Baltagi, 1995); by default gretl uses the method of Swamy and Arora (1972):
σε2 is estimated by the residual variance from the fixed effects model, and the sum σε2 + Ti σv2 is
estimated as Ti times the residual variance from the “between” estimator,

ȳi = X̄i β + ei

The latter regression is implemented by constructing a data set consisting of the group means
of all the relevant variables. Alternatively, if the --nerlove option is given, gretl uses the method
suggested by Nerlove (1971). In this case σv2 is estimated as the sample variance of the fixed effects,
n
1 X
σ̂v2 = (αi − ᾱ)2
n − 1 i=1

where n is the number of individuals and ᾱ is the mean of the fixed effects.

Choice of estimator
Which panel method should one use, fixed effects or random effects?
One way of answering this question is in relation to the nature of the data set. If the panel comprises
observations on a fixed and relatively small set of units of interest (say, the member states of the
European Union), there is a presumption in favor of fixed effects. If it comprises observations on a
large number of randomly selected individuals (as in many epidemiological and other longitudinal
studies), there is a presumption in favor of random effects.
Besides this general heuristic, however, various statistical issues must be taken into account.

1. Some panel data sets contain variables whose values are specific to the cross-sectional unit
but which do not vary over time. If you want to include such variables in the model, the fixed
effects option is simply not available. When the fixed effects approach is implemented using
dummy variables, the problem is that the time-invariant variables are perfectly collinear with
the per-unit dummies. When using the approach of subtracting the group means, the issue is
that after de-meaning these variables are nothing but zeros.

2. A somewhat analogous prohibition applies to the random effects estimator. This estimator is
in effect a matrix-weighted average of pooled OLS and the “between” estimator. Suppose we
have observations on n units or individuals and there are k independent variables of interest.
If k > n, the “between” estimator is undefined — since we have only n effective observations
— and hence so is the random effects estimator.
2 In a balanced panel, the value of θ is common to all individuals, otherwise it differs depending on the value of Ti .
Chapter 16. Panel data 125

If one does not fall foul of one or other of the prohibitions mentioned above, the choice between
fixed effects and random effects may be expressed in terms of the two econometric desiderata,
efficiency and consistency.
From a purely statistical viewpoint, we could say that there is a tradeoff between robustness and
efficiency. In the fixed effects approach, we do not make any hypotheses on the “group effects”
(that is, the time-invariant differences in mean between the groups) beyond the fact that they exist
— and that can be tested; see below. As a consequence, once these effects are swept out by taking
deviations from the group means, the remaining parameters can be estimated.
On the other hand, the random effects approach attempts to model the group effects as drawings
from a probability distribution instead of removing them. This requires that individual effects are
representable as a legitimate part of the disturbance term, that is, zero-mean random variables,
uncorrelated with the regressors.
As a consequence, the fixed-effects estimator “always works”, but at the cost of not being able to
estimate the effect of time-invariant regressors. The richer hypothesis set of the random-effects
estimator ensures that parameters for time-invariant regressors can be estimated, and that esti-
mation of the parameters for time-varying regressors is carried out more efficiently. These advan-
tages, though, are tied to the validity of the additional hypotheses. If, for example, there is reason
to think that individual effects may be correlated with some of the explanatory variables, then the
random-effects estimator would be inconsistent, while fixed-effects estimates would still be valid.
It is precisely on this principle that the Hausman test is built (see below): if the fixed- and random-
effects estimates agree, to within the usual statistical margin of error, there is no reason to think
the additional hypotheses invalid, and as a consequence, no reason not to use the more efficient RE
estimator.

Testing panel models

If you estimate a fixed effects or random effects model in the graphical interface, you may notice
that the number of items available under the “Tests” menu in the model window is relatively limited.
Panel models carry certain complications that make it difficult to implement all of the tests one
expects to see for models estimated on straight time-series or cross-sectional data.
Nonetheless, various panel-specific tests are printed along with the parameter estimates as a matter
of course, as follows.
When you estimate a model using fixed effects, you automatically get an F -test for the null hy-
pothesis that the cross-sectional units all have a common intercept. That is to say that all the αi s
are equal, in which case the pooled model (16.1), with a column of 1s included in the X matrix, is
adequate.
When you estimate using random effects, the Breusch–Pagan and Hausman tests are presented
automatically.
The Breusch–Pagan test is the counterpart to the F -test mentioned above. The null hypothesis is
that the variance of vi in equation (16.3) equals zero; if this hypothesis is not rejected, then again
we conclude that the simple pooled model is adequate.
The Hausman test probes the consistency of the GLS estimates. The null hypothesis is that these
estimates are consistent — that is, that the requirement of orthogonality of the vi and the Xi
is satisfied. The test is based on a measure, H, of the “distance” between the fixed-effects and
random-effects estimates, constructed such that under the null it follows the χ 2 distribution with
degrees of freedom equal to the number of time-varying regressors in the matrix X. If the value of
H is “large” this suggests that the random effects estimator is not consistent and the fixed-effects
model is preferable.
There are two ways of calculating H, the matrix-difference method and the regression method. The
procedure for the matrix-difference method is this:
Chapter 16. Panel data 126

• Collect the fixed-effects estimates in a vector β̃ and the corresponding random-effects esti-
mates in β̂, then form the difference vector (β̃ − β̂).

• Form the covariance matrix of the difference vector as Var(β̃ − β̂) = Var(β̃) − Var(β̂) = Ψ ,
where Var(β̃) and Var(β̂) are estimated by the sample variance matrices of the fixed- and
random-effects models respectively.3
 0  
• Compute H = β̃ − β̂ Ψ −1 β̃ − β̂ .

Given the relative efficiencies of β̃ and β̂, the matrix Ψ “should be” positive definite, in which case
H is positive, but in finite samples this is not guaranteed and of course a negative χ 2 value is not
admissible. The regression method avoids this potential problem. The procedure is:

• Treat the random-effects model as the restricted model, and record its sum of squared resid-
uals as SSRr .

• Estimate via OLS an unrestricted model in which the dependent variable is quasi-demeaned y
and the regressors include both quasi-demeaned X (as in the RE model) and the de-meaned
variants of all the time-varying variables (i.e. the fixed-effects regressors); record the sum of
squared residuals from this model as SSRu .

• Compute H = n (SSRr − SSRu ) /SSRu , where n is the total number of observations used. On
this variant H cannot be negative, since adding additional regressors to the RE model cannot
raise the SSR.

By default gretl computes the Hausman test via the regression method, but it uses the matrix-
difference method if you pass the option --matrix-diff to the panel command.

Robust standard errors

For most estimators, gretl offers the option of computing an estimate of the covariance matrix that
is robust with respect to heteroskedasticity and/or autocorrelation (and hence also robust standard
errors). In the case of panel data, robust covariance matrix estimators are available for the pooled
and fixed effects model but not currently for random effects. Please see section 15.4 for details.

16.2 Autoregressive panel models

Special problems arise when a lag of the dependent variable is included among the regressors in a
panel model. Consider a dynamic variant of the pooled model (16.1):

yit = Xit β + ρyit−1 + uit (16.7)

First, if the error uit includes a group effect, vi , then yit−1 is bound to be correlated with the error,
since the value of vi affects yi at all t. That means that OLS applied to (16.7) will be inconsistent
as well as inefficient. The fixed-effects model sweeps out the group effects and so overcomes this
particular problem, but a subtler issue remains, which applies to both fixed and random effects
estimation. Consider the de-meaned representation of fixed effects, as applied to the dynamic
model,
ỹit = X̃it β + ρ ỹi,t−1 + εit
where ỹit = yit − ȳi and εit = uit − ūi (or uit − αi , using the notation of equation 16.2). The trouble
is that ỹi,t−1 will be correlated with εit via the group mean, ȳi . The disturbance εit influences yit
directly, which influences ȳi , which, by construction, affects the value of ỹit for all t. The same
issue arises in relation to the quasi-demeaning used for random effects. Estimators which ignore
3 Hausman (1978) showed that the covariance of the difference takes this simple form when β̂ is an efficient estimator

and β̃ is inefficient.
Chapter 16. Panel data 127

this correlation will be consistent only as T → ∞ (in which case the marginal effect of εit on the
group mean of y tends to vanish).
One strategy for handling this problem, and producing consistent estimates of β and ρ, was pro-
posed by Anderson and Hsiao (1981). Instead of de-meaning the data, they suggest taking the first
difference of (16.7), an alternative tactic for sweeping out the group effects:

∆yit = ∆Xit β + ρ∆yi,t−1 + ηit (16.8)

where ηit = ∆uit = ∆(vi + εit ) = εit − εi,t−1 . We’re not in the clear yet, given the structure of the
error ηit : the disturbance εi,t−1 is an influence on both ηit and ∆yi,t−1 = yit − yi,t−1 . The next step
is then to find an instrument for the “contaminated” ∆yi,t−1 . Anderson and Hsiao suggest using
either yi,t−2 or ∆yi,t−2 , both of which will be uncorrelated with ηit provided that the underlying
errors, εit , are not themselves serially correlated.
The Anderson–Hsiao estimator is not provided as a built-in function in gretl, since gretl’s sensible
handling of lags and differences for panel data makes it a simple application of regression with
instrumental variables — see Example 16.1, which is based on a study of country growth rates by
Nerlove (1999).4

Example 16.1: The Anderson–Hsiao estimator for a dynamic panel model

# Penn World Table data as used by Nerlove

open penngrow.gdt
# Fixed effects (for comparison)
panel Y 0 Y(-1) X
# Random effects (for comparison)
panel Y 0 Y(-1) X --random-effects
# take differences of all variables
diff Y X
# Anderson-Hsiao, using Y(-2) as instrument
tsls d_Y d_Y(-1) d_X ; 0 d_X Y(-2)
# Anderson-Hsiao, using d_Y(-2) as instrument
tsls d_Y d_Y(-1) d_X ; 0 d_X d_Y(-2)

Although the Anderson–Hsiao estimator is consistent, it is not most efficient: it does not make the
fullest use of the available instruments for ∆yi,t−1 , nor does it take into account the differenced
structure of the error ηit . It is improved upon by the methods of Arellano and Bond (1991) and
Blundell and Bond (1998). These methods are taken up in the next chapter.

4 Also see Clint Cummins’ benchmarks page, http://www.stanford.edu/~clint/bench/.

 Chapter 17

Dynamic panel models

As of gretl version 1.9.2, the primary command for estimating dynamic panel models is dpanel.
The closely related arbond command has been available for some time, and is still present, but
whereas arbond only supports the so-called “difference” estimator (Arellano and Bond, 1991),
dpanel is addition offers the “system” estimator (Blundell and Bond, 1998), which has become
the method of choice in the applied literature.

17.1 Introduction
Notation
A dynamic linear panel data model can be represented as follows (in notation based on Arellano
(2003)):
yit = αyi,t−1 + β0 xit + ηi + vit (17.1)

The main idea on which the difference estimator is based is to get rid of the individual effect via
differencing:1 first-differencing eq. (17.1) yields

∆yit = α∆yi,t−1 + β0 ∆xit + ∆vit = γ 0 Wit + ∆vit , (17.2)

in obvious notation. The error term of (17.2) is, by construction, autocorrelated and also correlated
with the lagged dependent variable, so an estimator that takes both issues into account is needed.
The endogeneity issue is solved by noting that all values of yi,t−k , with k > 1 can be used as
instruments for ∆yi,t−1 : unobserved values of yi,t−k (because they could be missing, or pre-sample)
can safely be substituted with 0. In the language of GMM, this amounts to using the relation

E(∆vit · yi,t−k ) = 0, k>1 (17.3)

as an orthogonality condition.
Autocorrelation is dealt with by noting that, if vit is a white noise, then the covariance matrix of the
vector whose typical element is ∆vit is proportional to a matrix H that has 2 on the main diagonal,
−1 on the first subdiagonals and 0 elsewhere. In practice, one-step GMM estimation of equation
(17.2) amounts to computing
  −1  −1
N N N
 X 0   X 0 X
γ̂ =  Wi Zi Zi HZi   Z0i Wi  ×

i=1 i=1 i=1
  −1  
N
X N
X N
X
× W0i Zi   Z0i HZi   Z0i ∆yi  (17.4)
i=1 i=1 i=1

1 An alternative is “orthogonal deviations”: this is implemented in arbond, but not in dpanel, since it was a lot of work

and OD is very rarely seen in the wild.

128
Chapter 17. Dynamic panel models 129

where
h i0
∆yi = ∆yi,3 ··· ∆yi,T
" #0
∆yi,2 ··· ∆yi,T −1
Wi =
∆xi,3 ··· ∆xi,T
 0
yi1 0 0 ··· 0 ∆xi3
0 yi1 yi2 ··· 0
 
 ∆xi4 
Zi =
 
 .. 

 . 

0 0 0 ··· yi,T −2 ∆xiT

Once the 1-step estimator is computed, the sample covariance matrix of the estimated residuals
can be used instead of H to obtain 2-step estimates, which are not only consistent but asymp-
totically efficient.2 Standard GMM theory applies, except for one thing: Windmeijer (2005) has
computed finite-sample corrections to the asymptotic covariance matrix of the parameters, which
are nowadays almost universally used.
The difference estimator is consistent, but has been shown to have poor properties in finite samples
when α is near one. People these days prefer the so-called “system” estimator, which complements
the differenced data (with lagged levels used as instruments) with data in levels (using lagged
differences as instruments). The system estimator relies on an extra orthogonality condition which
has to do with the earliest value of the dependent variable yi,1 . The interested reader is referred
to Blundell and Bond (1998, pp. 124–125) for details, but here it suffices to say that this condition
is satisfied in mean-stationary models and brings about efficiency that may be substantial in many
cases.
The set of orthogonality conditions exploited in the system approach is not very much larger than
with the difference estimator, the reason being that most of the possible orthogonality conditions
associated with the equations in levels are redundant, given those already used for the equations
in differences.
The key equations of the system estimator can be written as

  −1  −1
N N N
 X 0   X 0 ∗   X 0 
γ̃ =  W̃ Z̃ Z̃ H Z̃ Z̃ W̃  ×
i=1 i=1 i=1
  −1  
N
X N
X N
X
× W̃0 Z̃  Z̃0 H ∗ Z̃  Z̃0 ∆ỹi  (17.5)
i=1 i=1 i=1

2 In theory, the process may be iterated, but nobody seems to be interested.

Chapter 17. Dynamic panel models 130

where
h i0
∆ỹi = ∆yi3 ··· ∆yiT yi3 ··· yiT
" #0
∆yi2 ··· ∆yi,T −1 yi2 ··· yi,T −1
W̃i =
∆xi3 ··· ∆xiT xi3 ··· xiT
 0
yi1 0 0 ··· 0 0 ··· 0 ∆xi,3
 

 0 yi1 yi2 ··· 0 0 ··· 0 ∆xi,4 

 .. 
.
 
 
 

 0 0 0 ··· yi,T −2 0 ··· 0 ∆xiT 
Z̃i = 
 .. 


 . 

0 0 0 ··· 0 ··· 0 xi3 
 
 ∆yi2
..
 
 

 . 

0 0 0 ··· 0 0 ··· ∆yi,T −1 xiT

In this case choosing a precise form for the matrix H ∗ for the first step is no trivial matter. Its
north-west block should be as similar as possible to the covariance matrix of the vector ∆vit , so
the same choice as the “difference” estimator is appropriate. Ideally, the south-east block should
be proportional to the covariance matrix of the vector ι ηi + v, that is σv2 I + ση2 ι ι 0 ; but since ση2 is
unknown and any positive definite matrix renders the estimator consistent, people just use I. The
off-diagonal blocks should, in principle, contain the covariances between ∆vis and vit , which would
be an identity matrix if vit is white noise. However, since the south-east block is typically given a
conventional value anyway, the benefit in making this choice is not obvious. Some packages use I;
others use a zero matrix. Asymptotically, it should not matter, but on real datasets the difference
between the resulting estimates can be noticeable.

Rank deficiency
Both the difference estimator
PN (17.4) and the system estimator (17.5) depend, for their existence, on
the invertibility of A = i=1 Z̃0 H ∗ Z̃. This matrix may turn out to be singular for several reasons.
However, this does not mean that the estimator is not computable: in some cases, adjustments
are possible such that the estimator does exist, but the user must be aware that in these cases not
all software packages use the same strategy and replication of results may prove difficult or even
impossible.
A first reason why A may be singular could be the unavailability of instruments, chiefly because
of missing observations. This case is easy to handle. If a particular row of Z̃i is zero for all
units, the corresponding orthogonality condition (or the corresponding instrument if you prefer) is
automatically dropped; of course, the overidentification rank is adjusted for testing purposes.
Even if no instruments are zero, however, A could be rank deficient. A trivial case occurs if there
are collinear instruments, but a less trivial case may arise when T (the total number of time periods
available) is not much smaller than N (the number of units), as, for example, in some macro datasets
where the units are countries. The total number of potentially usable orthogonality conditions is
O(T 2 ), which may well exceed N in some cases. Of course A is the sum of N matrices which have,
at most, rank 2T − 3 and therefore it could well happen that A is singular.
In all these cases, what we consider the “proper” way to go is to substitute the pseudo-inverse of
A (Moore–Penrose) for its regular inverse. Again, our choice is shared by some software packages,
but not all, so replication may be hard.
Chapter 17. Dynamic panel models 131

Treatment of missing values

Textbooks seldom bother with missing values, but in some cases their treatment may be far from
obvious. This is especially true if missing values are interspersed between valid observations. For
example, consider the plain difference estimator with one lag, so

yt = αyt−1 + η + t

where the i index is omitted for clarity. Suppose you have an individual with t = 1 . . . 5, for which
y3 is missing. It may seem that the data for this individual are unusable, because differencing yt
would produce something like
t 1 2 3 4 5
yt ∗ ∗ ◦ ∗ ∗
∆yt ◦ ∗ ◦ ◦ ∗
where ∗ = nonmissing and ◦ = missing. Estimation seems to be unfeasible, since there are no
periods in which ∆yt and ∆yt−1 are both observable.
However, we can use a k-difference operator and get

∆k yt = α∆k yt−1 + ∆k t

where ∆k = 1 − Lk and past levels of yt are perfectly valid instruments. In this example, we can
choose k = 3 and use y1 as an instrument, so this unit is in fact perfectly usable.
Not all software packages seem to be aware of this possibility, so replicating published results may
prove tricky if your dataset contains individuals with “gaps” between valid observations.

17.2 Usage
One of the concepts underlying the syntax of dpanel is that you get default values for several
choices you may want to make, so that in a “standard” situation the command itself is very short
to write (and read). The simplest case of the model (17.1) is a plain AR(1) process:

yi,t = αyi,t−1 + ηi + vit . (17.6)

If you give the command

dpanel 1 ; y

gretl assumes that you want to estimate (17.6) via the difference estimator (17.4), using as many
orthogonality conditions as possible. The scalar 1 between dpanel and the semicolon indicates that
only one lag of y is included as an explanatory variable; using 2 would give an AR(2) model. The
syntax that gretl uses for the non-seasonal AR and MA lags in an ARMA model is also supported in
this context.3 For example, if you want the first and third lags of y (but not the second) included as
explanatory variables you can say

dpanel {1 3} ; y

or you can use a pre-defined matrix for this purpose:

matrix ylags = {1, 3}

dpanel ylags ; y

To use a single lag of y other than the first you need to employ this mechanism:
3 This represents an enhancement over the arbond command.
Chapter 17. Dynamic panel models 132

dpanel {3} ; y # only lag 3 is included

dpanel 3 ; y # compare: lags 1, 2 and 3 are used

To use the system estimator instead, you add the --system option, as in

dpanel 1 ; y --system

The level orthogonality conditions and the corresponding instrument are appended automatically
(see eq. 17.5).

Regressors
If we want to introduce additional regressors, we list them after the dependent variable in the same
way as other gretl commands, such as ols.
For the difference orthogonality relations, dpanel takes care of transforming the regressors in par-
allel with the dependent variable. Note that this differs from gretl’s arbond command, where only
the dependent variable is differenced automatically; it brings us more in line with other software.
One case of potential ambiguity is when an intercept is specified but the difference-only estimator
is selected, as in

dpanel 1 ; y const

In this case the default dpanel behavior, which agrees with Stata’s xtabond2, is to drop the con-
stant (since differencing reduces it to nothing but zeros). However, for compatibility with the
DPD package for Ox, you can give the option --dpdstyle, in which case the constant is retained
(equivalent to including a linear trend in equation 17.1). A similar point applies to the period-
specific dummy variables which can be added in dpanel via the --time-dummies option: in the
differences-only case these dummies are entered in differenced form by default, but when the
--dpdstyle switch is applied they are entered in levels.
The standard gretl syntax applies if you want to use lagged explanatory variables, so for example
the command

dpanel 1 ; y const x(0 to -1) --system

would result in estimation of the model

yit = αyi,t−1 + β0 + β1 xit + β2 xi,t−1 + ηi + vit .

Instruments
The default rules for instruments are:

• lags of the dependent variable are instrumented using all available orthogonality conditions;
and

• additional regressors are considered exogenous, so they are used as their own instruments.

If a different policy is wanted, the instruments should be specified in an additional list, separated
from the regressors list by a semicolon. The syntax closely mirrors that for the tsls command,
but in this context it is necessary to distinguish between “regular” instruments and what are often
called “GMM-style” instruments (that, instruments that are handled in the same block-diagonal
manner as lags of the dependent variable, as described above).
“Regular” instruments are transformed in the same way as regressors, and the contemporaneous
value of the transformed variable is used to form an orthogonality condition. Since regressors are
treated as exogenous by default, it follows that these two commands estimate the same model:
Chapter 17. Dynamic panel models 133

dpanel 1 ; y z
dpanel 1 ; y z ; z

The instrument specification in the second case simply confirms what is implicit in the first: that
z is exogenous. Note, though, that if you have some additional variable z2 which you want to add
as a regular instrument, it then becomes necessary to include z in the instrument list if it is to be
treated as exogenous:

dpanel 1 ; y z ; z2 # z is now implicitly endogenous

dpanel 1 ; y z ; z z2 # z is treated as exogenous

The specification of “GMM-style” instruments is handled by the special constructs GMM() and
GMMlevel(). The first of these relates to instruments for the equations in differences, and the
second to the equations in levels. The syntax for GMM() is

GMM(varname, minlag, maxlag)

where varname is replaced by the name of a series, and minlag and maxlag are replaced by the
minimum and maximum lags to be used as instruments. The same goes for GMMlevel().
One common use of GMM() is to limit the number of lagged levels of the dependent variable used
as instruments for the equations in differences. It’s well known that although exploiting all pos-
sible orthogonality conditions yields maximal asymptotic efficiency, in finite samples it may be
preferable to use a smaller subset (but see also Okui (2009)). For example, the specification

dpanel 1 ; y ; GMM(y, 2, 4)

ensures that no lags of yt earlier than t − 4 will be used as instruments.

A second use of GMM() is to exploit more fully the potential block-diagonal orthogonality conditions
offered by an exogenous regressor, or a related variable that does not appear as a regressor. For
example, in

dpanel 1 ; y x ; GMM(z, 2, 6)

the variable x is considered an endogenous regressor, and up to 5 lags of z are used as instruments.
Note that in the following script fragment

dz = diff(z)
dpanel 1 ; y dz
dpanel 1 ; y dz ; GMM(z,0,0)

the two estimation commands should not be expected to give the same result, as the sets of orthog-
onality relationships are subtly different. In the latter case, you have T − 2 separate orthogonality
relationships pertaining to zit , none of which has any implication for the other ones; in the former
case, you only have one. In terms of the Zi matrix, the first form adds a single row to the bottom
of the instruments matrix, while the second form adds a diagonal block with T − 2 columns, that is
h i
∆zi3 ∆zi4 · · · ∆zit

versus  
∆zi3 0 ··· 0
0 ··· 0
 

 ∆zi4 

 .. .. 

 . . 

0 0 ··· ∆zit
Chapter 17. Dynamic panel models 134

17.3 Replication of DPD results

In this section we show how to replicate the results of some of the pioneering work with dynamic
panel-data estimators by Arellano, Bond and Blundell. As the DPD manual (Doornik, Arellano and
Bond, 2006) explains, it is difficult to replicate the original published results exactly, for two main
reasons: not all of the data used in those studies are publicly available; and some of the choices
made in the original software implementation of the estimators have been superseded. Here, there-
fore, our focus is on replicating the results obtained using the current DPD package and reported
in the DPD manual.
The examples are based on the program files abest1.ox, abest3.ox and bbest1.ox. These
are included in the DPD package, along with the Arellano–Bond database files abdata.bn7 and
abdata.in7.4 The Arellano–Bond data are also provided with gretl, in the file abdata.gdt. In the
following we do not show the output from DPD or gretl; it is somewhat voluminous, and is easily
generated by the user. As of this writing the results from Ox/DPD and gretl are identical in all
relevant respects for all of the examples shown.5
A complete Ox/DPD program to generate the results of interest takes this general form:

#include <oxstd.h>
#import <packages/dpd/dpd>

main()
{
decl dpd = new DPD();

dpd.Load("abdata.in7");
dpd.SetYear("YEAR");

// model-specific code here

delete dpd;
}

In the examples below we take this template for granted and show just the model-specific code.

Example 1
The following Ox/DPD code—drawn from abest1.ox— replicates column (b) of Table 4 in Arellano
and Bond (1991), an instance of the differences-only or GMM-DIF estimator. The dependent variable
is the log of employment, n; the regressors include two lags of the dependent variable, current and
lagged values of the log real-product wage, w, the current value of the log of gross capital, k, and
current and lagged values of the log of industry output, ys. In addition the specification includes
a constant and five year dummies; unlike the stochastic regressors, these deterministic terms are
not differenced. In this specification the regressors w, k and ys are treated as exogenous and serve
as their own instruments. In DPD syntax this requires entering these variables twice, on the X_VAR
and I_VAR lines. The GMM-type (block-diagonal) instruments in this example are the second and
subsequent lags of the level of n. Both 1-step and 2-step estimates are computed.

dpd.SetOptions(FALSE); // don’t use robust standard errors

dpd.Select(Y_VAR, {"n", 0, 2});
dpd.Select(X_VAR, {"w", 0, 1, "k", 0, 0, "ys", 0, 1});
dpd.Select(I_VAR, {"w", 0, 1, "k", 0, 0, "ys", 0, 1});

4 Seehttp://www.doornik.com/download.html.
5 Tobe specific, this is using Ox Console version 5.10, version 1.24 of the DPD package, and gretl built from CVS as of
2010-10-23, all on Linux.
Chapter 17. Dynamic panel models 135

dpd.Gmm("n", 2, 99);
dpd.SetDummies(D_CONSTANT + D_TIME);

print("\n\n***** Arellano & Bond (1991), Table 4 (b)");

dpd.SetMethod(M_1STEP);
dpd.Estimate();
dpd.SetMethod(M_2STEP);
dpd.Estimate();

Here is gretl code to do the same job:

open abdata.gdt
list X = w w(-1) k ys ys(-1)
dpanel 2 ; n X const --time-dummies --asy --dpdstyle
dpanel 2 ; n X const --time-dummies --asy --two-step --dpdstyle

Note that in gretl the switch to suppress robust standard errors is --asymptotic, here abbreviated
to --asy.6 The --dpdstyle flag specifies that the constant and dummies should not be differenced,
in the context of a GMM-DIF model. With gretl’s dpanel command it is not necessary to specify the
exogenous regressors as their own instruments since this is the default; similarly, the use of the
second and all longer lags of the dependent variable as GMM-type instruments is the default and
need not be stated explicitly.

Example 2
The DPD file abest3.ox contains a variant of the above that differs with regard to the choice of
instruments: the variables w and k are now treated as predetermined, and are instrumented GMM-
style using the second and third lags of their levels. This approximates column (c) of Table 4 in
Arellano and Bond (1991). We have modified the code in abest3.ox slightly to allow the use of
robust (Windmeijer-corrected) standard errors, which are the default in both DPD and gretl with
2-step estimation:

dpd.Select(Y_VAR, {"n", 0, 2});

dpd.Select(X_VAR, {"w", 0, 1, "k", 0, 0, "ys", 0, 1});
dpd.Select(I_VAR, {"ys", 0, 1});
dpd.SetDummies(D_CONSTANT + D_TIME);

dpd.Gmm("n", 2, 99);
dpd.Gmm("w", 2, 3);
dpd.Gmm("k", 2, 3);

print("\n***** Arellano & Bond (1991), Table 4 (c)\n");

print(" (but using different instruments!!)\n");
dpd.SetMethod(M_2STEP);
dpd.Estimate();

The gretl code is as follows:

open abdata.gdt
list X = w w(-1) k ys ys(-1)
list Ivars = ys ys(-1)
dpanel 2 ; n X const ; GMM(w,2,3) GMM(k,2,3) Ivars --time --two-step --dpd

Note that since we are now calling for an instrument set other then the default (following the second
semicolon), it is necessary to include the Ivars specification for the variable ys. However, it is
not necessary to specify GMM(n,2,99) since this remains the default treatment of the dependent
variable.
6 Option flags in gretl can always be truncated, down to the minimal unique abbreviation.
Chapter 17. Dynamic panel models 136

Example 3
Our third example replicates the DPD output from bbest1.ox: this uses the same dataset as the
previous examples but the model specifications are based on Blundell and Bond (1998), and involve
comparison of the GMM-DIF and GMM-SYS (“system”) estimators. The basic specification is slightly
simplified in that the variable ys is not used and only one lag of the dependent variable appears as
a regressor. The Ox/DPD code is:

dpd.Select(Y_VAR, {"n", 0, 1});

dpd.Select(X_VAR, {"w", 0, 1, "k", 0, 1});
dpd.SetDummies(D_CONSTANT + D_TIME);

print("\n\n***** Blundell & Bond (1998), Table 4: 1976-86 GMM-DIF");

dpd.Gmm("n", 2, 99);
dpd.Gmm("w", 2, 99);
dpd.Gmm("k", 2, 99);
dpd.SetMethod(M_2STEP);
dpd.Estimate();

print("\n\n***** Blundell & Bond (1998), Table 4: 1976-86 GMM-SYS");

dpd.GmmLevel("n", 1, 1);
dpd.GmmLevel("w", 1, 1);
dpd.GmmLevel("k", 1, 1);
dpd.SetMethod(M_2STEP);
dpd.Estimate();

Here is the corresponding gretl code:

open abdata.gdt
list X = w w(-1) k k(-1)

# Blundell & Bond (1998), Table 4: 1976-86 GMM-DIF

dpanel 1 ; n X const ; GMM(w,2,99) GMM(k,2,99) --time --two-step --dpd

# Blundell & Bond (1998), Table 4: 1976-86 GMM-SYS

dpanel 1 ; n X const ; GMM(w,2,99) GMM(k,2,99) \
GMMlevel(w,1,1) GMMlevel(k,1,1) --time --two-step --dpd --system

Note the use of the --system option flag to specify GMM-SYS, including the default treatment of
the dependent variable, which corresponds to GMMlevel(n,1,1). In this case we also want to
use lagged differences of the regressors w and k as instruments for the levels equations so we
need explicit GMMlevel entries for those variables. If you want something other than the default
treatment for the dependent variable as an instrument for the levels equations, you should give an
explicit GMMlevel specification for that variable — and in that case the --system flag is redundant
(but harmless).
For the sake of completeness, note that if you specify at least one GMMlevel term, dpanel will then
include equations in levels, but it will not automatically add a default GMMlevel specification for
the dependent variable unless the --system option is given.

17.4 Cross-country growth example

The previous examples all used the Arellano–Bond dataset; for this example we use the dataset
CEL.gdt, which is also included in the gretl distribution. As with the Arellano–Bond data, there
are numerous missing values. Details of the provenance of the data can be found by opening the
dataset information window in the gretl GUI (Data menu, Dataset info item). This is a subset of the
Barro–Lee 138-country panel dataset, an approximation to which is used in Caselli, Esquivel and
Chapter 17. Dynamic panel models 137

Lefort (1996) and Bond, Hoeffler and Temple (2001).7 Both of these papers explore the dynamic
panel-data approach in relation to the issues of growth and convergence of per capita income across
countries.
The dependent variable is growth in real GDP per capita over successive five-year periods; the
regressors are the log of the initial (five years prior) value of GDP per capita, the log-ratio of in-
vestment to GDP, s, in the prior five years, and the log of annual average population growth, n,
over the prior five years plus 0.05 as stand-in for the rate of technical progress, g, plus the rate of
depreciation, δ (with the last two terms assumed to be constant across both countries and periods).
The original model is

∆5 yit = βyi,t−5 + αsit + γ(nit + g + δ) + νt + ηi + it (17.7)

which allows for a time-specific disturbance νt . The Solow model with Cobb–Douglas production
function implies that γ = −α, but this assumption is not imposed in estimation. The time-specific
disturbance is eliminated by subtracting the period mean from each of the series.
Equation (17.7) can be transformed to an AR(1) dynamic panel-data model by adding yi,t−5 to both
sides, which gives
yit = (1 + β)yi,t−5 + αsit + γ(nit + g + δ) + ηi + it (17.8)
where all variables are now assumed to be time-demeaned.
In (rough) replication of Bond et al. (2001) we now proceed to estimate the following two models:
(a) equation (17.8) via GMM-DIF, using as instruments the second and all longer lags of yit , sit and
nit + g + δ; and (b) equation (17.8) via GMM-SYS, using ∆yi,t−1 , ∆si,t−1 and ∆(ni,t−1 + g + δ) as
additional instruments in the levels equations. We report robust standard errors throughout. (As a
purely notational matter, we now use “t − 1” to refer to values five years prior to t, as in Bond et al.
(2001)).
The gretl script to do this job is shown below. Note that the final transformed versions of the
variables (logs, with time-means subtracted) are named ly (yit ), linv (sit ) and lngd (nit + g + δ).

open CEL.gdt

ngd = n + 0.05
ly = log(y)
linv = log(s)
lngd = log(ngd)

# take out time means

loop i=1..8 --quiet
smpl (time == i) --restrict --replace
ly -= mean(ly)
linv -= mean(linv)
lngd -= mean(lngd)
endloop

smpl --full
list X = linv lngd
# 1-step GMM-DIF
dpanel 1 ; ly X ; GMM(linv,2,99) GMM(lngd,2,99)
# 2-step GMM-DIF
dpanel 1 ; ly X ; GMM(linv,2,99) GMM(lngd,2,99) --two-step
# GMM-SYS
dpanel 1 ; ly X ; GMM(linv,2,99) GMM(lngd,2,99) \
GMMlevel(linv,1,1) GMMlevel(lngd,1,1) --two-step --sys
7 We say an “approximation” because we have not been able to replicate exactly the OLS results reported in the papers

cited, though it seems from the description of the data in Caselli et al. (1996) that we ought to be able to do so. We note
that Bond et al. (2001) used data provided by Professor Caselli yet did not manage to reproduce the latter’s results.
Chapter 17. Dynamic panel models 138

For comparison we estimated the same two models using Ox/DPD and the Stata command xtabond2.
(In each case we constructed a comma-separated values dataset containing the data as transformed
in the gretl script shown above, using a missing-value code appropriate to the target program.) For
reference, the commands used with Stata are reproduced below:

insheet using CEL.csv

tsset unit time
xtabond2 ly L.ly linv lngd, gmm(L.ly, lag(1 99)) gmm(linv, lag(2 99))
gmm(lngd, lag(2 99)) rob nolev
xtabond2 ly L.ly linv lngd, gmm(L.ly, lag(1 99)) gmm(linv, lag(2 99))
gmm(lngd, lag(2 99)) rob nolev twostep
xtabond2 ly L.ly linv lngd, gmm(L.ly, lag(1 99)) gmm(linv, lag(2 99))
gmm(lngd, lag(2 99)) rob nocons twostep

For the GMM-DIF model all three programs find 382 usable observations and 30 instruments, and
yield identical parameter estimates and robust standard errors (up to the number of digits printed,
or more); see Table 17.1.8

1-step 2-step
coeff std. error coeff std. error
ly(-1) 0.577564 0.1292 0.610056 0.1562
linv 0.0565469 0.07082 0.100952 0.07772
lngd −0.143950 0.2753 −0.310041 0.2980

Table 17.1: GMM-DIF: Barro–Lee data

Results for GMM-SYS estimation are shown in Table 17.2. In this case we show two sets of gretl
results: those labeled “gretl(1)” were obtained using gretl’s --dpdstyle option, while those labeled
“gretl(2)” did not use that option—the intent being to reproduce the H matrices used by Ox/DPD
and xtabond2 respectively.

gretl(1) Ox/DPD gretl(2) xtabond2

ly(-1) 0.9237 (0.0385) 0.9167 (0.0373) 0.9073 (0.0370) 0.9073 (0.0370)
linv 0.1592 (0.0449) 0.1636 (0.0441) 0.1856 (0.0411) 0.1856 (0.0411)
lngd −0.2370 (0.1485) −0.2178 (0.1433) −0.2355 (0.1501) −0.2355 (0.1501)

Table 17.2: 2-step GMM-SYS: Barro–Lee data (standard errors in parentheses)

In this case all three programs use 479 observations; gretl and xtabond2 use 41 instruments and
produce the same estimates (when using the same H matrix) while Ox/DPD nominally uses 66.9
It is noteworthy that with GMM-SYS plus “messy” missing observations, the results depend on the
precise array of instruments used, which in turn depends on the details of the implementation of
the estimator.

Auxiliary test statistics

We have concentrated above on the parameter estimates and standard errors. It may be worth
adding a few words on the additional test statistics that typically accompany both GMM-DIF and
8 The coefficient shown for ly(-1) in the Tables is that reported directly by the software; for comparability with the

original model (eq. 17.7) it is necesary to subtract 1, which produces the expected negative value indicating conditional
convergence in per capita income.
9 This is a case of the issue described in section 17.1: the full A matrix turns out to be singular and special measures

must be taken to produce estimates.

Chapter 17. Dynamic panel models 139

GMM-SYS estimation. These include the Sargan test for overidentification, one or more Wald tests
for the joint significance of the regressors, and time dummies if applicable, and tests for first- and
second-order autocorrelation of the residuals from the equations in differences.
In general we see a good level of agreement between gretl, DPD and xtabond2 with regard to these
statistics, with a few relatively minor exceptions. Specifically, xtabond2 computes both a “Sargan
test” and a “Hansen test” for overidentification, but what it calls the Hansen test is what DPD and
gretl call the Sargan test. (We have had difficulty determining from the xtabond2 documentation
(Roodman, 2006) exactly how its Sargan test is computed.) In addition there are cases where the
degrees of freedom for the Sargan test differ between DPD and gretl; this occurs when the A matrix
is singular (section 17.1). In concept the df equals the number of instruments minus the number
of parameters estimated; for the first of these terms gretl uses the rank of A, while DPD appears to
use the full dimension of A.

17.5 Memo: dpanel options

flag effect

--asymptotic Suppresses the use of robust standard errors

--two-step Calls for 2-step estimation (the default being 1-step)
--system Calls for GMM-SYS, with default treatment of the dependent variable,
as in GMMlevel(y,1,1)
--time-dummies Includes period-specific dummy variables
--dpdstyle Compute the H matrix as in DPD; also suppresses differencing of
automatic time dummies and omission of intercept in the GMM-DIF
case
--verbose When --two-step is selected, prints the 1-step estimates first
--vcv Calls for printing of the covariance matrix
--quiet Suppresses the printing of results
 Chapter 18

Nonlinear least squares

18.1 Introduction and examples

Gretl supports nonlinear least squares (NLS) using a variant of the Levenberg–Marquardt algorithm.
The user must supply a specification of the regression function; prior to giving this specification the
parameters to be estimated must be “declared” and given initial values. Optionally, the user may
supply analytical derivatives of the regression function with respect to each of the parameters.
If derivatives are not given, the user must instead give a list of the parameters to be estimated
(separated by spaces or commas), preceded by the keyword params. The tolerance (criterion for
terminating the iterative estimation procedure) can be adjusted using the set command.
The syntax for specifying the function to be estimated is the same as for the genr command. Here
are two examples, with accompanying derivatives.

# Consumption function from Greene

nls C = alpha + beta * Y^gamma
deriv alpha = 1
deriv beta = Y^gamma
deriv gamma = beta * Y^gamma * log(Y)
end nls

# Nonlinear function from Russell Davidson

nls y = alpha + beta * x1 + (1/beta) * x2
deriv alpha = 1
deriv beta = x1 - x2/(beta*beta)
end nls --vcv

Note the command words nls (which introduces the regression function), deriv (which introduces
the specification of a derivative), and end nls, which terminates the specification and calls for
estimation. If the --vcv flag is appended to the last line the covariance matrix of the parameter
estimates is printed.

18.2 Initializing the parameters

The parameters of the regression function must be given initial values prior to the nls command.
This can be done using the genr command (or, in the GUI program, via the menu item “Variable,
Define new variable”).
In some cases, where the nonlinear function is a generalization of (or a restricted form of) a linear
model, it may be convenient to run an ols and initialize the parameters from the OLS coefficient
estimates. In relation to the first example above, one might do:

ols C 0 Y
genr alpha = $coeff(0)
genr beta = $coeff(Y)
genr gamma = 1

And in relation to the second example one might do:

140
Chapter 18. Nonlinear least squares 141

ols y 0 x1 x2
genr alpha = $coeff(0)
genr beta = $coeff(x1)

18.3 NLS dialog window

It is probably most convenient to compose the commands for NLS estimation in the form of a
gretl script but you can also do so interactively, by selecting the item “Nonlinear Least Squares”
under the “Model, Nonlinear models” menu. This opens a dialog box where you can type the
function specification (possibly prefaced by genr lines to set the initial parameter values) and the
derivatives, if available. An example of this is shown in Figure 18.1. Note that in this context you
do not have to supply the nls and end nls tags.

Figure 18.1: NLS dialog box

18.4 Analytical and numerical derivatives

If you are able to figure out the derivatives of the regression function with respect to the para-
meters, it is advisable to supply those derivatives as shown in the examples above. If that is not
possible, gretl will compute approximate numerical derivatives. However, the properties of the NLS
algorithm may not be so good in this case (see section 18.7).
This is done by using the params statement, which should be followed by a list of identifiers
containing the parameters to be estimated. In this case, the examples above would read as follows:

# Greene
nls C = alpha + beta * Y^gamma
params alpha beta gamma
end nls

# Davidson
nls y = alpha + beta * x1 + (1/beta) * x2
params alpha beta
end nls

If analytical derivatives are supplied, they are checked for consistency with the given nonlinear
function. If the derivatives are clearly incorrect estimation is aborted with an error message. If the
Chapter 18. Nonlinear least squares 142

derivatives are “suspicious” a warning message is issued but estimation proceeds. This warning
may sometimes be triggered by incorrect derivatives, but it may also be triggered by a high degree
of collinearity among the derivatives.
Note that you cannot mix analytical and numerical derivatives: you should supply expressions for
all of the derivatives or none.

18.5 Controlling termination

The NLS estimation procedure is an iterative process. Iteration is terminated when the criterion for
convergence is met or when the maximum number of iterations is reached, whichever comes first.
Let k denote the number of parameters being estimated. The maximum number of iterations is
100 × (k + 1) when analytical derivatives are given, and 200 × (k + 1) when numerical derivatives
are used.
Let  denote a small number. The iteration is deemed to have converged if at least one of the
following conditions is satisfied:

• Both the actual and predicted relative reductions in the error sum of squares are at most .

• The relative error between two consecutive iterates is at most .

This default value of  is the machine precision to the power 3/4,1 but it can be adjusted using the
set command with the parameter nls_toler. For example

set nls_toler .0001

will relax the value of  to 0.0001.

18.6 Details on the code

The underlying engine for NLS estimation is based on the minpack suite of functions, available
from netlib.org. Specifically, the following minpack functions are called:

lmder Levenberg–Marquardt algorithm with analytical derivatives

chkder Check the supplied analytical derivatives
lmdif Levenberg–Marquardt algorithm with numerical derivatives
fdjac2 Compute final approximate Jacobian when using numerical derivatives
dpmpar Determine the machine precision

On successful completion of the Levenberg–Marquardt iteration, a Gauss–Newton regression is used

to calculate the covariance matrix for the parameter estimates. If the --robust flag is given a
robust variant is computed. The documentation for the set command explains the specific options
available in this regard.
Since NLS results are asymptotic, there is room for debate over whether or not a correction for
degrees of freedom should be applied when calculating the standard error of the regression (and
the standard errors of the parameter estimates). For comparability with OLS, and in light of the
reasoning given in Davidson and MacKinnon (1993), the estimates shown in gretl do use a degrees
of freedom correction.
1 On a 32-bit Intel Pentium machine a likely value for this parameter is 1.82 × 10−12 .
Chapter 18. Nonlinear least squares 143

18.7 Numerical accuracy

Table 18.1 shows the results of running the gretl NLS procedure on the 27 Statistical Reference
Datasets made available by the U.S. National Institute of Standards and Technology (NIST) for test-
ing nonlinear regression software.2 For each dataset, two sets of starting values for the parameters
are given in the test files, so the full test comprises 54 runs. Two full tests were performed, one
using all analytical derivatives and one using all numerical approximations. In each case the default
tolerance was used.3
Out of the 54 runs, gretl failed to produce a solution in 4 cases when using analytical derivatives,
and in 5 cases when using numeric approximation. Of the four failures in analytical derivatives
mode, two were due to non-convergence of the Levenberg–Marquardt algorithm after the maximum
number of iterations (on MGH09 and Bennett5, both described by NIST as of “Higher difficulty”) and
two were due to generation of range errors (out-of-bounds floating point values) when computing
the Jacobian (on BoxBOD and MGH17, described as of “Higher difficulty” and “Average difficulty”
respectively). The additional failure in numerical approximation mode was on MGH10 (“Higher diffi-
culty”, maximum number of iterations reached).
The table gives information on several aspects of the tests: the number of outright failures, the
average number of iterations taken to produce a solution and two sorts of measure of the accuracy
of the estimates for both the parameters and the standard errors of the parameters.
For each of the 54 runs in each mode, if the run produced a solution the parameter estimates
obtained by gretl were compared with the NIST certified values. We define the “minimum correct
figures” for a given run as the number of significant figures to which the least accurate gretl esti-
mate agreed with the certified value, for that run. The table shows both the average and the worst
case value of this variable across all the runs that produced a solution. The same information is
shown for the estimated standard errors.4
The second measure of accuracy shown is the percentage of cases, taking into account all parame-
ters from all successful runs, in which the gretl estimate agreed with the certified value to at least
the 6 significant figures which are printed by default in the gretl regression output.
Using analytical derivatives, the worst case values for both parameters and standard errors were
improved to 6 correct figures on the test machine when the tolerance was tightened to 1.0e−14.
Using numerical derivatives, the same tightening of the tolerance raised the worst values to 5
correct figures for the parameters and 3 figures for standard errors, at a cost of one additional
failure of convergence.
Note the overall superiority of analytical derivatives: on average solutions to the test problems
were obtained with substantially fewer iterations and the results were more accurate (most notably
for the estimated standard errors). Note also that the six-digit results printed by gretl are not 100
percent reliable for difficult nonlinear problems (in particular when using numerical derivatives).
Having registered this caveat, the percentage of cases where the results were good to six digits or
better seems high enough to justify their printing in this form.

2 For a discussion of gretl’s accuracy in the estimation of linear models, see Appendix D.
3 The data shown in the table were gathered from a pre-release build of gretl version 1.0.9, compiled with gcc 3.3,
linked against glibc 2.3.2, and run under Linux on an i686 PC (IBM ThinkPad A21m).
4 For the standard errors, I excluded one outlier from the statistics shown in the table, namely Lanczos1. This is an odd

case, using generated data with an almost-exact fit: the standard errors are 9 or 10 orders of magnitude smaller than the
coefficients. In this instance gretl could reproduce the certified standard errors to only 3 figures (analytical derivatives)
and 2 figures (numerical derivatives).
Chapter 18. Nonlinear least squares 144

Table 18.1: Nonlinear regression: the NIST tests

Analytical derivatives Numerical derivatives

Failures in 54 tests 4 5
Average iterations 32 127
Mean of min. correct figures, 8.120 6.980
parameters
Worst of min. correct figures, 4 3
parameters
Mean of min. correct figures, 8.000 5.673
standard errors
Worst of min. correct figures, 5 2
standard errors
Percent correct to at least 6 figures, 96.5 91.9
parameters
Percent correct to at least 6 figures, 97.7 77.3
standard errors
 Chapter 19

Maximum likelihood estimation

19.1 Generic ML estimation with gretl

Maximum likelihood estimation is a cornerstone of modern inferential procedures. Gretl provides
a way to implement this method for a wide range of estimation problems, by use of the mle com-
mand. We give here a few examples.
To give a foundation for the examples that follow, we start from a brief reminder on the basics
1
of ML estimation. Given a sample of size T , it is possible to define the density function
 for the
whole sample, namely the joint distribution of all the observations f (Y; θ), where Y = y1 , . . . , yT .
Its shape is determined by a k-vector of unknown parameters θ, which we assume is contained in
a set Θ, and which can be used to evaluate the probability of observing a sample with any given
characteristics.
After observing the data, the values Y are given, and this function can be evaluated for any legiti-
mate value of θ. In this case, we prefer to call it the likelihood function; the need for another name
stems from the fact that this function works as a density when we use the yt s as arguments and θ
as parameters, whereas in this context θ is taken as the function’s argument, and the data Y only
have the role of determining its shape.
In standard cases, this function has a unique maximum. The location of the maximum is unaffected
if we consider the logarithm of the likelihood (or log-likelihood for short): this function will be
denoted as
`(θ) = log f (Y; θ)
The log-likelihood functions that gretl can handle are those where `(θ) can be written as

T
X
`(θ) = `t (θ)
t=1

which is true in most cases of interest. The functions `t (θ) are called the log-likelihood contribu-
tions.
Moreover, the location of the maximum is obviously determined by the data Y. This means that the
value
θ̂(Y) =Argmax `(θ) (19.1)
θ∈Θ

is some function of the observed data (a statistic), which has the property, under mild conditions,
of being a consistent, asymptotically normal and asymptotically efficient estimator of θ.
Sometimes it is possible to write down explicitly the function θ̂(Y); in general, it need not be so. In
these circumstances, the maximum can be found by means of numerical techniques. These often
rely on the fact that the log-likelihood is a smooth function of θ, and therefore on the maximum
its partial derivatives should all be 0. The gradient vector, or score vector, is a function that enjoys
many interesting statistical properties in its own right; it will be denoted here as g(θ). It is a
1 We are supposing here that our data are a realization of continuous random variables. For discrete random variables,
everything continues to apply by referring to the probability function instead of the density. In both cases, the distribution
may be conditional on some exogenous variables.

145
Chapter 19. Maximum likelihood estimation 146

k-vector with typical element

T
∂`(θ) X ∂`t (θ)
gi (θ) = =
∂θi t=1
∂θi

Gradient-based methods can be shortly illustrated as follows:

1. pick a point θ0 ∈ Θ;

2. evaluate g(θ0 );

3. if g(θ0 ) is “small”, stop. Otherwise, compute a direction vector d(g(θ0 ));

4. evaluate θ1 = θ0 + d(g(θ0 ));

5. substitute θ0 with θ1 ;

6. restart from 2.

Many algorithms of this kind exist; they basically differ from one another in the way they compute
the direction vector d(g(θ0 )), to ensure that `(θ1 ) > `(θ0 ) (so that we eventually end up on the
maximum).
The default method gretl uses to maximize the log-likelihood is a gradient-based algorithm known
as the BFGS (Broyden, Fletcher, Goldfarb and Shanno) method. This technique is used in most
econometric and statistical packages, as it is well-established and remarkably powerful. Clearly,
in order to make this technique operational, it must be possible to compute the vector g(θ) for
any value of θ. In some cases this vector can be written explicitly as a function of Y. If this is
not possible or too difficult the gradient may be evaluated numerically. The alternative Newton-
Raphson algorithm is also available, which is more effective under some circumstances but is also
more fragile; see section 19.8 and chapter 29 for details.
The choice of the starting value, θ0 , is crucial in some contexts and inconsequential in others. In
general, however, it is advisable to start the algorithm from “sensible” values whenever possible. If
a consistent estimator is available, this is usually a safe and efficient choice: this ensures that in
large samples the starting point will be likely close to θ̂ and convergence can be achieved in few
iterations.
The maximum number of iterations allowed for the BFGS procedure, and the relative tolerance
for assessing convergence, can be adjusted using the set command: the relevant variables are
bfgs_maxiter (default value 500) and bfgs_toler (default value, the machine precision to the
power 3/4).

Covariance matrix and standard errors

By default the covariance matrix of the parameter estimates is based on the Outer Product of the
Gradient. That is,
 −1
d OPG (θ̂) = G0 (θ̂)G(θ̂)
Var (19.2)

where G(θ̂) is the T × k matrix of contributions to the gradient. Two other options are available. If
the --hessian flag is given, the covariance matrix is computed from a numerical approximation to
the Hessian at convergence. If the --robust option is selected, the quasi-ML “sandwich” estimator
is used:
d QML (θ̂) = H(θ̂)−1 G0 (θ̂)G(θ̂)H(θ̂)−1
Var
where H denotes the numerical approximation to the Hessian.
Chapter 19. Maximum likelihood estimation 147

19.2 Gamma estimation

Suppose we have a sample of T independent and identically distributed observations from a Gamma
distribution. The density function for each observation xt is
αp p−1
f (xt ) = x exp (−αxt ) (19.3)
Γ (p) t
The log-likelihood for the entire sample can be written as the logarithm of the joint density of all
the observations. Since these are independent and identical, the joint density is the product of the
individual densities, and hence its log is
T T
" #
X αp p−1 X
`(α, p) = log xt exp (−αxt ) = `t (19.4)
t=1
Γ (p) t=1

where
`t = p · log(αxt ) − γ(p) − log xt − αxt
and γ(·) is the log of the gamma function. In order to estimate the parameters α and p via ML, we
need to maximize (19.4) with respect to them. The corresponding gretl code snippet is

scalar alpha = 1
scalar p = 1

mle logl = p*ln(alpha * x) - lngamma(p) - ln(x) - alpha * x

params alpha p
end mle

The first two statements

alpha = 1
p = 1

are necessary to ensure that the variables alpha and p exist before the computation of logl is
attempted. Inside the mle block these variables (which could be either scalars, vectors or a com-
bination of the two — see below for an example) are identified as the parameters that should be
adjusted to maximize the likelihood via the params keyword. Their values will be changed by the
execution of the mle command; upon successful completion, they will be replaced by the ML esti-
mates. The starting value is 1 for both; this is arbitrary and does not matter much in this example
(more on this later).
The above code can be made more readable, and marginally more efficient, by defining a variable
to hold α · xt . This command can be embedded in the mle block as follows:

mle logl = p*ln(ax) - lngamma(p) - ln(x) - ax

series ax = alpha*x
params alpha p
end mle

The variable ax is not added to the params list, of course, since it is just an auxiliary variable to
facilitate the calculations. You can insert as many such auxiliary lines as you require before the
params line, with the restriction that they must contain either (a) commands to generate series,
scalars or matrices or (b) print commands (which may be used to aid in debugging).
In a simple example like this, the choice of the starting values is almost inconsequential; the algo-
rithm is likely to converge no matter what the starting values are. However, consistent method-of-
moments estimators of p and α can be simply recovered from the sample mean m and variance V :
since it can be shown that
E(xt ) = p/α V (xt ) = p/α2
Chapter 19. Maximum likelihood estimation 148

it follows that the following estimators

ᾱ = m/V
p̄ = m · ᾱ

are consistent, and therefore suitable to be used as starting point for the algorithm. The gretl script
code then becomes

scalar m = mean(x)
scalar alpha = m/var(x)
scalar p = m*alpha

mle logl = p*ln(ax) - lngamma(p) - ln(x) - ax

series ax = alpha*x
params alpha p
end mle

Another thing to note is that sometimes parameters are constrained within certain boundaries: in
this case, for example, both α and p must be positive numbers. Gretl does not check for this: it
is the user’s responsibility to ensure that the function is always evaluated at an admissible point
in the parameter space during the iterative search for the maximum. An effective technique is to
define a variable for checking that the parameters are admissible and setting the log-likelihood as
undefined if the check fails. An example, which uses the conditional assignment operator, follows:

scalar m = mean(x)
scalar alpha = m/var(x)
scalar p = m*alpha

mle logl = check ? p*ln(ax) - lngamma(p) - ln(x) - ax : NA

series ax = alpha*x
scalar check = (alpha>0) && (p>0)
params alpha p
end mle

19.3 Stochastic frontier cost function

When modeling a cost function, it is sometimes worthwhile to incorporate explicitly into the sta-
tistical model the notion that firms may be inefficient, so that the observed cost deviates from the
theoretical figure not only because of unobserved heterogeneity between firms, but also because
two firms could be operating at a different efficiency level, despite being identical under all other
respects. In this case we may write
Ci = Ci∗ + ui + vi
where Ci is some variable cost indicator, Ci∗ is its “theoretical” value, ui is a zero-mean disturbance
term and vi is the inefficiency term, which is supposed to be nonnegative by its very nature.
A linear specification for Ci∗ is often chosen. For example, the Cobb–Douglas cost function arises
when Ci∗ is a linear function of the logarithms of the input prices and the output quantities.
The stochastic frontier model is a linear model of the form yi = xi β + εi in which 
the error term
εi is the sum of ui and vi . A common postulate is that ui ∼ N(0, σu2 ) and vi ∼ N(0, σv2 ). If


independence between ui and vi is also assumed, then it is possible to show that the density
function of εi has the form: s
2 λεi 1 εi
   
f (εi ) = φ (19.5)
π σ σ σ
Φ

q Φ(·) and φ(·) are, respectively, the distribution and density function of the standard normal,
where
σ = σu2 + σv2 and λ = σ u
σv .
Chapter 19. Maximum likelihood estimation 149

As a consequence, the log-likelihood for one observation takes the form (apart form an irrelevant
constant)
εi2
 " #
λεi

`t = log Φ − log(σ ) +
σ 2σ 2
Therefore, a Cobb–Douglas cost function with stochastic frontier is the model described by the
following equations:

log Ci = log Ci∗ + εi

m
X n
X
log Ci∗ = c+ βj log yij + αj log pij
j=1 j=1
εi = ui + vi
ui ∼ N(0, σu2 )
 
vi ∼ N(0, σv2 )
 

In most cases, one wants to ensure that the homogeneity of the cost function
Pn with respect to
the prices holds by construction. Since this requirement is equivalent to j=1 αj = 1, the above
equation for Ci∗ can be rewritten as

m
X n
X
log Ci − log pin = c + βj log yij + αj (log pij − log pin ) + εi (19.6)
j=1 j=2

The above equation could be estimated by OLS, but it would suffer from two drawbacks: first,
the OLS estimator for the intercept c is inconsistent because the disturbance term has a non-zero
expected value; second, the OLS estimators for the other parameters are consistent, but inefficient
in view of the non-normality of εi . Both issues can be addressed by estimating (19.6) by maximum
likelihood. Nevertheless, OLS estimation is a quick and convenient way to provide starting values
for the MLE algorithm.
Example 19.1 shows how to implement the model described so far. The banks91 file contains part
of the data used in Lucchetti, Papi and Zazzaro (2001).
The script in example 19.1 is relatively easy to modify to show how one can use vectors (that is,
1-dimensional matrices) for storing the parameters to optimize: example 19.2 holds essentially the
same script in which the parameters of the cost function are stored together in a vector. Of course,
this makes also possible to use variable lists and other refinements which make the code more
compact and readable.

19.4 GARCH models

GARCH models are handled by gretl via a native function. However, it is instructive to see how they
can be estimated through the mle command.2
The following equations provide the simplest example of a GARCH(1,1) model:

yt = µ + εt
εt = ut · σt
ut ∼ N(0, 1)
2
ht = ω + αεt−1 + βht−1 .

Since the variance of yt depends on past values, writing down the log-likelihood function is not
simply a matter of summing the log densities for individual observations. As is common in time
2 The gig addon, which handles other variants of conditionally heteroskedastic models, uses mle as its internal engine.
Chapter 19. Maximum likelihood estimation 150

Example 19.1: Estimation of stochastic frontier cost function (with scalar parameters)

open banks91

# Cobb-Douglas cost function

ols cost const y p1 p2 p3

# Cobb-Douglas cost function with homogeneity restrictions

genr rcost = cost - p3

genr rp1 = p1 - p3
genr rp2 = p2 - p3

ols rcost const y rp1 rp2

# Cobb-Douglas cost function with homogeneity restrictions

# and inefficiency

scalar b0 = $coeff(const)
scalar b1 = $coeff(y)
scalar b2 = $coeff(rp1)
scalar b3 = $coeff(rp2)

scalar su = 0.1
scalar sv = 0.1

mle logl = ln(cnorm(e*lambda/ss)) - (ln(ss) + 0.5*(e/ss)^2)

scalar ss = sqrt(su^2 + sv^2)
scalar lambda = su/sv
series e = rcost - b0*const - b1*y - b2*rp1 - b3*rp2
params b0 b1 b2 b3 su sv
end mle
Chapter 19. Maximum likelihood estimation 151

Example 19.2: Estimation of stochastic frontier cost function (with matrix parameters)

open banks91

# Cobb-Douglas cost function

ols cost const y p1 p2 p3

# Cobb-Douglas cost function with homogeneity restrictions

genr rcost = cost - p3

genr rp1 = p1 - p3
genr rp2 = p2 - p3

list X = const y rp1 rp2

ols rcost X

# Cobb-Douglas cost function with homogeneity restrictions

# and inefficiency

matrix b = $coeff
scalar su = 0.1
scalar sv = 0.1

mle logl = ln(cnorm(e*lambda/ss)) - (ln(ss) + 0.5*(e/ss)^2)

scalar ss = sqrt(su^2 + sv^2)
scalar lambda = su/sv
series e = rcost - lincomb(X, b)
params b su sv
end mle
Chapter 19. Maximum likelihood estimation 152

series models, yt cannot be considered independent of the other observations in our sample, and
consequently the density function for the whole sample (the joint density for all observations) is
not just the product of the marginal densities.
Maximum likelihood estimation, in these cases, is achieved by considering conditional densities, so
what we maximize is a conditional likelihood function. If we define the information set at time t as

Ft = yt , yt−1 , . . . ,

then the density of yt conditional on Ft−1 is normal:

yt |Ft−1 ∼ N [µ, ht ] .

By means of the properties of conditional distributions, the joint density can be factorized as
follows  
T
Y
f (yt , yt−1 , . . .) =  f (yt |Ft−1 ) · f (y0 )
t=1

If we treat y0 as fixed, then the term f (y0 ) does not depend on the unknown parameters, and there-
fore the conditional log-likelihood can then be written as the sum of the individual contributions
as
XT
`(µ, ω, α, β) = `t (19.7)
t=1

where " !# " #

1 yt − µ 1 (yt − µ)2
`t = log p φ p =− log(ht ) +
ht ht 2 ht

The following script shows a simple application of this technique, which uses the data file djclose;
it is one of the example dataset supplied with gretl and contains daily data from the Dow Jones
stock index.

open djclose

series y = 100*ldiff(djclose)

scalar mu = 0.0
scalar omega = 1
scalar alpha = 0.4
scalar beta = 0.0

mle ll = -0.5*(log(h) + (e^2)/h)

series e = y - mu
series h = var(y)
series h = omega + alpha*(e(-1))^2 + beta*h(-1)
params mu omega alpha beta
end mle

19.5 Analytical derivatives

Computation of the score vector is essential for the working of the BFGS method. In all the previous
examples, no explicit formula for the computation of the score was given, so the algorithm was fed
numerically evaluated gradients. Numerical computation of the score for the i-th parameter is
performed via a finite approximation of the derivative, namely

∂`(θ1 , . . . , θn ) `(θ1 , . . . , θi + h, . . . , θn ) − `(θ1 , . . . , θi − h, . . . , θn )

'
∂θi 2h
Chapter 19. Maximum likelihood estimation 153

where h is a small number.

In many situations, this is rather efficient and accurate. A better approximation to the true deriva-
tive may be obtained by forcing mle to use a technique known as Richardson Extrapolation, which
gives extremely precise results, but is considerably more CPU-intensive. This feature may be turned
on by using the set command as in

set bfgs_richardson on

However, one might want to avoid the approximation and specify an exact function for the deriva-
tives. As an example, consider the following script:

nulldata 1000

genr x1 = normal()
genr x2 = normal()
genr x3 = normal()

genr ystar = x1 + x2 + x3 + normal()

genr y = (ystar > 0)

scalar b0 = 0
scalar b1 = 0
scalar b2 = 0
scalar b3 = 0

mle logl = y*ln(P) + (1-y)*ln(1-P)

series ndx = b0 + b1*x1 + b2*x2 + b3*x3
series P = cnorm(ndx)
params b0 b1 b2 b3
end mle --verbose

Here, 1000 data points are artificially generated for an ordinary probit model:3 yt is a binary
variable, which takes the value 1 if yt∗ = β1 x1t + β2 x2t + β3 x3t + εt > 0 and 0 otherwise. Therefore,
yt = 1 with probability Φ(β1 x1t + β2 x2t + β3 x3t ) = πt . The probability function for one observation
can be written as
y
P (yt ) = πt t (1 − πt )1−yt
Since the observations are independent and identically distributed, the log-likelihood is simply the
sum of the individual contributions. Hence
T
X
`= yt log(πt ) + (1 − yt ) log(1 − πt )
t=1

The --verbose switch at the end of the end mle statement produces a detailed account of the
iterations done by the BFGS algorithm.
In this case, numerical differentiation works rather well; nevertheless, computation of the analytical
∂`
score is straightforward, since the derivative ∂βi can be written as

∂` ∂` ∂πt
= ·
∂βi ∂πt ∂βi
via the chain rule, and it is easy to see that
∂` yt 1 − yt
= −
∂πt πt 1 − πt
∂πt
= φ(β1 x1t + β2 x2t + β3 x3t ) · xit
∂βi
3 Again, gretl does provide a native probit command (see section 30.1), but a probit model makes for a nice example

here.
Chapter 19. Maximum likelihood estimation 154

The mle block in the above script can therefore be modified as follows:

mle logl = y*ln(P) + (1-y)*ln(1-P)

series ndx = b0 + b1*x1 + b2*x2 + b3*x3
series P = cnorm(ndx)
series m = dnorm(ndx)*(y/P - (1-y)/(1-P))
deriv b0 = m
deriv b1 = m*x1
deriv b2 = m*x2
deriv b3 = m*x3
end mle --verbose

Note that the params statement has been replaced by a series of deriv statements; these have the
double function of identifying the parameters over which to optimize and providing an analytical
expression for their respective score elements.

19.6 Debugging ML scripts

We have discussed above the main sorts of statements that are permitted within an mle block,
namely

• auxiliary commands to generate helper variables;

• deriv statements to specify the gradient with respect to each of the parameters; and

• a params statement to identify the parameters in case analytical derivatives are not given.

For the purpose of debugging ML estimators one additional sort of statement is allowed: you can
print the value of a relevant variable at each step of the iteration. This facility is more restricted
then the regular print command. The command word print should be followed by the name of
just one variable (a scalar, series or matrix).
In the last example above a key variable named m was generated, forming the basis for the analytical
derivatives. To track the progress of this variable one could add a print statement within the ML
block, as in

series m = dnorm(ndx)*(y/P - (1-y)/(1-P))

print m

19.7 Using functions

The mle command allows you to estimate models that gretl does not provide natively: in some
cases, it may be a good idea to wrap up the mle block in a user-defined function (see Chapter 10),
so as to extend gretl’s capabilities in a modular and flexible way.
As an example, we will take a simple case of a model that gretl does not yet provide natively:
the zero-inflated Poisson model, or ZIP for short.4 In this model, we assume that we observe a
mixed population: for some individuals, the variable yt is (conditionally on a vector of exogenous
covariates xt ) distributed as a Poisson random variate; for some others, yt is identically 0. The
trouble is, we don’t know which category a given individual belongs to.
For instance, suppose we have a sample of women, and the variable yt represents the number of
children that woman t has. There may be a certain proportion, α, of women for whom yt = 0 with
certainty (maybe out of a personal choice, or due to physical impossibility). But there may be other
4 The actual ZIP model is in fact a bit more general than the one presented here. The specialized version discussed in

this section was chosen for the sake of simplicity. For futher details, see Greene (2003).
Chapter 19. Maximum likelihood estimation 155

women for whom yt = 0 just as a matter of chance — they haven’t happened to have any children
at the time of observation.
In formulae:
" y #
µt t
P (yt = k|xt ) = αdt + (1 − α) e−µt
yt !
µt = exp(xt β)
(
1 for yt = 0
dt =
0 for yt > 0

Writing a mle block for this model is not difficult:

mle ll = logprob
series xb = exp(b0 + b1 * x)
series d = (y=0)
series poiprob = exp(-xb) * xb^y / gamma(y+1)
series logprob = (alpha>0) && (alpha<1) ? \
log(alpha*d + (1-alpha)*poiprob) : NA
params alpha b0 b1
end mle -v

However, the code above has to be modified each time we change our specification by, say, adding
an explanatory variable. Using functions, we can simplify this task considerably and eventually be
able to write something easy like

list X = const x
zip(y, X)

Example 19.3: Zero-inflated Poisson Model — user-level function

/*
user-level function: estimate the model and print out
the results
*/
function void zip(series y, list X)
matrix coef_stde = zip_estimate(y, X)
printf "\nZero-inflated Poisson model:\n"
string parnames = "alpha,"
string parnames += varname(X)
modprint coef_stde parnames
end function

Let’s see how this can be done. First we need to define a function called zip() that will take two ar-
guments: a dependent variable y and a list of explanatory variables X. An example of such function
can be seen in script 19.3. By inspecting the function code, you can see that the actual estimation
does not happen here: rather, the zip() function merely uses the built-in modprint command to
print out the results coming from another user-written function, namely zip_estimate().
The function zip_estimate() is not meant to be executed directly; it just contains the number-
crunching part of the job, whose results are then picked up by the end function zip(). In turn,
zip_estimate() calls other user-written functions to perform other tasks. The whole set of “in-
ternal” functions is shown in the panel 19.4.
Chapter 19. Maximum likelihood estimation 156

Example 19.4: Zero-inflated Poisson Model — internal functions

/* compute log probabilities for the plain Poisson model */

function series ln_poi_prob(series y, list X, matrix beta)
series xb = lincomb(X, beta)
return -exp(xb) + y*xb - lngamma(y+1)
end function

/* compute log probabilities for the zero-inflated Poisson model */

function series ln_zip_prob(series y, list X, matrix beta, scalar p0)
# check if the probability is in [0,1]; otherwise, return NA
if (p0>1) || (p0<0)
series ret = NA
else
series ret = ln_poi_prob(y, X, beta) + ln(1-p0)
series ret = (y=0) ? ln(p0 + exp(ret)) : ret
endif
return ret
end function

/* do the actual estimation (silently) */

function matrix zip_estimate(series y, list X)
# initialize alpha to a "sensible" value: half the frequency
# of zeros in the sample
scalar alpha = mean(y=0)/2
# initialize the coeffs (we assume the first explanatory
# variable is the constant here)
matrix coef = zeros(nelem(X), 1)
coef[1] = mean(y) / (1-alpha)
# do the actual ML estimation
mle ll = ln_zip_prob(y, X, coef, alpha)
params alpha coef
end mle --hessian --quiet
return $coeff ~ $stderr
end function
Chapter 19. Maximum likelihood estimation 157

All the functions shown in 19.3 and 19.4 can be stored in a separate inp file and executed once, at
the beginning of our job, by means of the include command. Assuming the name of this script file
is zip_est.inp, the following is an example script which (a) includes the script file, (b) generates a
simulated dataset, and (c) performs the estimation of a ZIP model on the artificial data.

set echo off

set messages off

# include the user-written functions

include zip_est.inp

# generate the artificial data

nulldata 1000
set seed 732237
scalar truep = 0.2
scalar b0 = 0.2
scalar b1 = 0.5
series x = normal()
series y = (uniform()<truep) ? 0 : genpois(exp(b0 + b1*x))
list X = const x

# estimate the zero-inflated Poisson model

zip(y, X)

The results are as follows:

Zero-inflated Poisson model:

coefficient std. error z-stat p-value

-------------------------------------------------------
alpha 0.203069 0.0238035 8.531 1.45e-17 ***
const 0.257014 0.0417129 6.161 7.21e-10 ***
x 0.466657 0.0321235 14.53 8.17e-48 ***

A further step may then be creating a function package for accessing your new zip() function via
gretl’s graphical interface. For details on how to do this, see section 10.5.

19.8 Advanced use of mle: functions, analytical derivatives, algorithm choice

All the techniques decribed in the previous sections may be combined, and mle can be used for
solving non-standard estimation problems (provided, of course, that one chooses maximum likeli-
hood as the preferred inference method).
The strategy that, as of this writing, has proven most successful in designing scripts for this pur-
pose is:

• Modularize your code as much as possible.

• Use analytical derivatives whenever possible.

• Choose your optimization method wisely.

In the rest of this section, we will expand on the probit example of section 19.5 to give the reader
an idea of what a “heavy-duty” application of mle looks like. Most of the code fragments come from
mle-advanced.inp, which is one of the sample scripts supplied with the standard installation of
gretl (see under File > Script files > Practice File).
Chapter 19. Maximum likelihood estimation 158

BFGS with and without analytical derivatives

The example in section 19.5 can be made more general by using matrices and user-written func-
tions. Consider the following code fragment:

list X = const x1 x2 x3
matrix b = zeros(nelem(X),1)

mle logl = y*ln(P) + (1-y)*ln(1-P)

series ndx = lincomb(X, b)
series P = cnorm(ndx)
params b
end mle

In this context, the fact that the model we are estimating has four explanatory variables is totally
incidental: the code is written in such a way that we could change the content of the list X without
having to make any other modification. This was made possible by:

1. gathering the parameters to estimate into a single vector b rather than using separate scalars;

2. using the nelem() function to initialize b, so that its dimension is kept track of automatically;

3. using the lincomb() function to compute the index function.

A parallel enhancement could be achieved in the case of analytically computed derivatives: since
b is now a vector, mle expects the argument to the deriv keyword to be a matrix, in which each
column is the partial derivative to the corresponding element of b. It is useful to re-write the score
for the i-th observation as
∂`i
= mi x0i (19.8)
∂β
where mi is the “signed Mills’ ratio”, that is

φ(x0i β) φ(x0i β)
mi = yi 0 − (1 − yi ) ,
Φ(xi β) 1 − Φ(x0i β)

which was computed in section 19.5 via

series P = cnorm(ndx)
series m = dnorm(ndx)*(y/P - (1-y)/(1-P))

Here, we will code it in a somewhat terser way as

series m = y ? invmills(-ndx) : -invmills(ndx)

and make use of the conditional assignment operator and of the specialized function invmills()
for efficiency. Building the score matrix is now easily achieved via

mle logl = y*ln(P) + (1-y)*ln(1-P)

series ndx = lincomb(X, b)
series P = cnorm(ndx)
series m = y ? invmills(-ndx) : -invmills(ndx)
matrix mX = {X}
deriv b = mX .* {m}
end mle

in which the {} operator was used to turn series and lists into matrices (see chapter 13). However,
proceeding in this way for more complex models than probit may imply inserting into the mle
Chapter 19. Maximum likelihood estimation 159

block a long series of instructions; the example above merely happens to be short because the
score matrix for the probit model is very easy to write in matrix form.
A better solution is writing a user-level function to compute the score and using that inside the mle
block, as in

function matrix score(matrix b, series y, list X)

series ndx = lincomb(X, b)
series m = y ? invmills(-ndx) : -invmills(ndx)
return {m} .* {X}
end function

[...]

mle logl = y*ln(P) + (1-y)*ln(1-P)

series ndx = lincomb(X, b)
series P = cnorm(ndx)
deriv b = score(b, y, X)
end mle

In this way, no matter how complex the computation of the score is, the mle block remains nicely
compact.

Newton’s method and the analytical Hessian

Since version 1.9.7, gretl offers the user the option of using Newton’s method for maximizing the
log-likelihood. In terms of the notation used in section 19.1, the direction for updating the inital
parameter vector θ0 is given by

d [g(θ0 )] = −λH(θ0 )−1 g(θ0 ), (19.9)

where H(θ) is the Hessian of the total loglikelihood computed at θ and 0 < λ < 1 is a scalar called
the step length.
The above expression makes a few points clear:

1. At each step, it must be possible to compute not only the score g(θ), but also its derivative
H(θ);

2. the matrix H(θ) should be nonsingular;

3. it is assumed that for some positive value of λ, `(θ1 ) > `(θ0 ); in other words, that going in
the direction d [g(θ0 )] leads upwards for some step length.

The strength of Newton’s method lies in the fact that, if the loglikelihood is globally concave,
then (19.9) enjoys certain optimality properties and the number of iterations required to reach the
maximum is often much smaller than it would be with other methods, such as BFGS. However, it
may have some disadvantages: for a start, the Hessian H(θ) may be difficult or very expensive to
compute; moreover, the loglikelihood may not be globally concave, so for some values of θ, the
matrix H(θ) is not negative definite or perhaps even singular. Those cases are handled by gretl’s
implementation of Newton’s algorithm by means of several heuristic techniques5 , but a number of
adverse consequences may occur, which range from longer computation time for optimization to
non-convergence of the algorithm.
As a consequence, using Newton’s method is advisable only when the computation of the Hessian
is not too CPU-intensive and the nature of the estimator is such that it is known in advance that
5 The gist to it is that, if H is not negative definite, it is substituted by k · dg(H) + (1 − k) · H, where k is a suitable

scalar; however, if you’re interested in the precise details, you’ll be much better off looking at the source code: the file
you’ll want to look at is lib/src/gretl_bfgs.c.
Chapter 19. Maximum likelihood estimation 160

the loglikelihood is globally concave. The probit models satisfies both requisites, so we will expand
the preceding example to illustrate how to use Newton’s method in gretl.
A first example may be given simply by issuing the command

set optimizer newton

before the mle block.6 This will instruct gretl to use Newton’s method instead of BFGS. If the deriv
keyword is used, gretl will differentiate the score function numerically; otherwise, if the score
has to be computed itself numerically, gretl will calculate H(θ) by differentiating the loglikelihood
numerically twice. The latter solution, though, is generally to be avoided, as may be extremely
time-consuming and may yield imprecise results.
A much better option is to calculate the Hessian analytically and have gretl use its true value rather
than a numerical approximation. In most cases, this is both much faster and numerically stable,
but of course comes at the price of having to differentiate the loglikelihood twice to respect with
the parameters and translate the resulting expressions into efficient hansl code.
Luckily, both tasks are relatively easy in the probit case: the matrix of second derivatives of `i may
be written as
∂ 2 `i 
0

= −m i mi + xi β xi x0i
∂β∂β0
so the total Hessian is  
w1
n w2
 
X ∂ 2 `i 
0

= −X X (19.10)

∂β∂β0
 ..
i=1

 . 

wn
 
where wi = mi mi + x0i β . It can be shown that wi > 0, so the Hessian is guaranteed to be negative
definite in all sensible cases and the conditions are ideal for applying Newton’s method.
A hansl translation of equation (19.10) may look like

function void Hess(matrix *H, matrix b, series y, list X)

/* computes the negative Hessian for a Probit model */
series ndx = lincomb(X, b)
series m = y ? invmills(-ndx) : -invmills(ndx)
series w = m*(m+ndx)
matrix mX = {X}
H = (mX .* {w})’mX
end function

There are two characteristics worth noting of the function above. For a start, it doesn’t return
anything: the result of the computation is simply stored in the matrix pointed at by the first
argument of the function. Second, the result is not the Hessian proper, but rather its negative. This
function becomes usable from within an mle block by the keyword hessian. The syntax is

mle ...
...
hessian funcname(&mat_addr, ...)
end mle

In other words, the hessian keyword must be followed by the call to a function whose first argu-
ment is a matrix pointer which is supposed to be filled with the negative of the Hessian at θ.
Another feature worth noting is that gretl does not perform any numerical check on whether the
function computes the Hessian correctly or not. On the one hand, this means that you can trick
6 To go back to BFGS, you use set optimizer bfgs.
Chapter 19. Maximum likelihood estimation 161

mle into using alternatives to the Hessian and thereby implement other optimization methods. For
example, if you substitute in equation 19.9 the Hessian H with the negative of the OPG matrix −G0 G,
as defined in (19.2), you get the so-called BHHH optimization method (see Berndt et al. (1974)).
Again, the sample file mle-advanced.inp provides an example. On the other hand, you may want
to perform a check of your analytically-computed H matrix versus a numerical approximation.
If you have a function that computes the score, this is relatively simple to do by using the fdjac
function, briefly described in section 29.4, which computes a numerical approximation to a deriv-
ative. In practice, you need a function computing g(θ) as a row vector and then use fdjac to
differentiate it numerically with respect to θ. The result can then be compared to your analytically-
computed Hessian. The code fragment below shows an example of how this can be done in the
probit case:

function matrix totalscore(matrix *b, series y, list X)

/* computes the total score */
return sumc(score(b, y, X))
end function

function void check(matrix b, series y, list X)

/* compares the analytical Hessian to its numerical
approximation obtained via fdjac */
matrix aH
Hess(&aH, b, y, X) # stores the analytical Hessian into aH

matrix nH = fdjac(b, "totalscore(&b, y, X)")

nH = 0.5*(nH + nH’) # force symmetry

printf "Numerical Hessian\n%16.6f\n", nH

printf "Analytical Hessian (negative)\n%16.6f\n", aH
printf "Check (should be zero)\n%16.6f\n", nH + aH
end function
 Chapter 20

GMM estimation

20.1 Introduction and terminology

The Generalized Method of Moments (GMM) is a very powerful and general estimation method,
which encompasses practically all the parametric estimation techniques used in econometrics. It
was introduced in Hansen (1982) and Hansen and Singleton (1982); an excellent and thorough
treatment is given in chapter 17 of Davidson and MacKinnon (1993).
The basic principle on which GMM is built is rather straightforward. Suppose we wish to estimate
a scalar parameter θ based on a sample x1 , x2 , . . . , xT . Let θ0 indicate the “true” value of θ. Theo-
retical considerations (either of statistical or economic nature) may suggest that a relationship like
the following holds:  
E xt − g(θ) = 0 a θ = θ0 , (20.1)
with g(·) a continuous and invertible function. That is to say, there exists a function of the data
and the parameter, with the property that it has expectation zero if and only if it is evaluated at the
true parameter value. For example, economic models with rational expectations lead to expressions
like (20.1) quite naturally.
If the sampling model for the xt s is such that some version of the Law of Large Numbers holds,
then
T
1 X p
X̄ = xt −→ g(θ0 );
T t=1

hence, since g(·) is invertible, the statistic

p
θ̂ = g −1 (X̄) −→ θ0 ,

so θ̂ is a consistent estimator of θ. A different way to obtain the same outcome is to choose, as an

estimator of θ, the value that minimizes the objective function
 2
T
1 X  2
F (θ) =  (xt − g(θ)) = X̄ − g(θ) ; (20.2)
T t=1

the minimum is trivially reached at θ̂ = g −1 (X̄), since the expression in square brackets equals 0.
The above reasoning can be generalized as follows: suppose θ is an n-vector and we have m
relations like
E [fi (xt , θ)] = 0 for i = 1 . . . m, (20.3)
where E[·] is a conditional expectation on a set of p variables zt , called the instruments. In the
above simple example, m = 1 and f (xt , θ) = xt − g(θ), and the only instrument used is zt = 1.
Then, it must also be true that
h i h i
E fi (xt , θ) · zj,t = E fi,j,t (θ) = 0 for i = 1 . . . m and j = 1 . . . p; (20.4)

equation (20.4) is known as an orthogonality condition, or moment condition. The GMM estimator is
defined as the minimum of the quadratic form

F (θ, W ) = f̄0 W f̄, (20.5)

162
Chapter 20. GMM estimation 163

where f̄ is a (1 × m · p) vector holding the average of the orthogonality conditions and W is some
symmetric, positive definite matrix, known as the weights matrix. A necessary condition for the
minimum to exist is the order condition n ≤ m · p.
The statistic
θ̂ =Argmin F (θ, W ) (20.6)
θ

is a consistent estimator of θ whatever the choice of W . However, to achieve maximum asymp-

totic efficiency W must be proportional to the inverse of the long-run covariance matrix of the
orthogonality conditions; if W is not known, a consistent estimator will suffice.
These considerations lead to the following empirical strategy:

1. Choose a positive definite W and compute the one-step GMM estimator θ̂1 . Customary choices
for W are Im·p or Im ⊗ (Z 0 Z)−1 .

2. Use θ̂1 to estimate V (fi,j,t (θ)) and use its inverse as the weights matrix. The resulting esti-
mator θ̂2 is called the two-step estimator.

3. Re-estimate V (fi,j,t (θ)) by means of θ̂2 and obtain θ̂3 ; iterate until convergence. Asymp-
totically, these extra steps are unnecessary, since the two-step estimator is consistent and
efficient; however, the iterated estimator often has better small-sample properties and should
be independent of the choice of W made at step 1.

In the special case when the number of parameters n is equal to the total number of orthogonality
conditions m · p, the GMM estimator θ̂ is the same for any choice of the weights matrix W , so the
first step is sufficient; in this case, the objective function is 0 at the minimum.
If, on the contrary, n < m · p, the second step (or successive iterations) is needed to achieve
efficiency, and the estimator so obtained can be very different, in finite samples, from the one-
step estimator. Moreover, the value of the objective function at the minimum, suitably scaled by
the number of observations, yields Hansen’s J statistic; this statistic can be interpreted as a test
statistic that has a χ 2 distribution with m · p − n degrees of freedom under the null hypothesis of
correct specification. See Davidson and MacKinnon (1993, section 17.6) for details.
In the following sections we will show how these ideas are implemented in gretl through some
examples.

20.2 OLS as GMM

It is instructive to start with a somewhat contrived example: consider the linear model yt = xt β +
ut . Although most of us are used to read it as the sum of a hazily defined “systematic part” plus an
equally hazy “disturbance”, a more rigorous interpretation of this familiar expression comes from
the hypothesis that the conditional mean E(yt |xt ) is linear and the definition of ut as yt − E(yt |xt ).
From the definition of ut , it follows that E(ut |xt ) = 0. The following orthogonality condition is
therefore available:
E [f (β)] = 0, (20.7)
where f (β) = (yt − xt β)xt . The definitions given in the previous section therefore specialize here
to:

• θ is β;

• the instrument is xt ;

• fi,j,t (θ) is (yt −xt β)xt = ut xt ; the orthogonality condition is interpretable as the requirement
that the regressors should be uncorrelated with the disturbances;
Chapter 20. GMM estimation 164

• W can be any symmetric positive definite matrix, since the number of parameters equals the
number of orthogonality conditions. Let’s say we choose I.

• The function F (θ, W ) is in this case

 2
T
1 X
F (θ, W ) =  (ût xt )
T t=1

and it is easy to see why OLS and GMM coincide here: the GMM objective function has the
same minimizer as the objective function of OLS, the residual sum of squares. Note, however,
that the two functions are not equal to one another: at the minimum, F (θ, W ) = 0 while the
minimized sum of squared residuals is zero only in the special case of a perfect linear fit.

The code snippet contained in Example 20.1 uses gretl’s gmm command to make the above opera-
tional.

Example 20.1: OLS via GMM

/* initialize stuff */
series e = 0
scalar beta = 0
matrix W = I(1)

/* proceed with estimation */

gmm
series e = y - x*beta
orthog e ; x
weights W
params beta
end gmm

We feed gretl the necessary ingredients for GMM estimation in a command block, starting with gmm
and ending with end gmm. After the end gmm statement two mutually exclusive options can be
specified: --two-step or --iterate, whose meaning should be obvious.
Three elements are compulsory within a gmm block:

1. one or more orthog statements

2. one weights statement

3. one params statement

The three elements should be given in the stated order.

The orthog statements are used to specify the orthogonality conditions. They must follow the
syntax

orthog x ; Z

where x may be a series, matrix or list of series and Z may also be a series, matrix or list. In
example 20.1, the series e holds the “residuals” and the series x holds the regressor. If x had been
a list (a matrix), the orthog statement would have generated one orthogonality condition for each
element (column) of x. Note the structure of the orthogonality condition: it is assumed that the
term to the left of the semicolon represents a quantity that depends on the estimated parameters
(and so must be updated in the process of iterative estimation), while the term on the right is a
constant function of the data.
Chapter 20. GMM estimation 165

The weights statement is used to specify the initial weighting matrix and its syntax is straightfor-
ward. But please note. . .

+ In cases other than one-step estimation the specified weights matrix will be overwritten with the final
weights on completion of the gmm command. If you wish to execute more than one GMM block with a
common starting-point it is therefore necessary to reinitialize the weights matrix between runs.
The params statement specifies the parameters with respect to which the GMM criterion should be
minimized; it follows the same logic and rules as in the mle and nls commands.
The minimum is found through numerical minimization via BFGS (see chapters 29 and 19). The
progress of the optimization procedure can be observed by appending the --verbose switch to
the end gmm line.

20.3 TSLS as GMM

Moving closer to the proper domain of GMM, we now consider two-stage least squares (TSLS) as a
case of GMM.
TSLS is employed in the case where one wishes to estimate a linear model of the form yt = Xt β+ut ,
but where one or more of the variables in the matrix X are potentially endogenous — correlated
with the error term, u. We proceed by identifying a set of instruments, Zt , which are explanatory
for the endogenous variables in X but which are plausibly uncorrelated with u. The classic two-
stage procedure is (1) regress the endogenous elements of X on Z; then (2) estimate the equation
of interest, with the endogenous elements of X replaced by their fitted values from (1).
An alternative perspective is given by GMM. We define the residual ût as yt − Xt β̂, as usual. But
instead of relying on E(u|X) = 0 as in OLS, we base estimation on the condition E(u|Z) = 0. In this
case it is natural to base the initial weighting matrix on the covariance matrix of the instruments.
Example 20.2 presents a model from Stock and Watson’s Introduction to Econometrics. The demand
for cigarettes is modeled as a linear function of the logs of price and income; income is treated as
exogenous while price is taken to be endogenous and two measures of tax are used as instruments.
Since we have two instruments and one endogenous variable the model is over-identified and there-
fore the weights matrix will influence the solution. Partial output from this script is shown in 20.3.
The estimated standard errors from GMM are robust by default; if we supply the --robust option
to the tsls command we get identical results.1

20.4 Covariance matrix options

The covariance matrix of the estimated parameters depends on the choice of W through

Σ̂ = (J 0 W J)−1 J 0 W ΩW J(J 0 W J)−1 (20.8)

where J is a Jacobian term

∂ f¯i
Jij =
∂θj
and Ω is the long-run covariance matrix of the orthogonality conditions.
Gretl computes J by numeric differentiation (there is no provision for specifying a user-supplied
analytical expression for J at the moment). As for Ω, a consistent estimate is needed. The simplest
choice is the sample covariance matrix of the ft s:

T
1 X
Ω̂0 (θ) = ft (θ)ft (θ)0 (20.9)
T t=1
1 The data file used in this example is available in the Stock and Watson package for gretl. See http://gretl.

sourceforge.net/gretl_data.html.
Chapter 20. GMM estimation 166

Example 20.2: TSLS via GMM

open cig_ch10.gdt
# real avg price including sales tax
genr ravgprs = avgprs / cpi
# real avg cig-specific tax
genr rtax = tax / cpi
# real average total tax
genr rtaxs = taxs / cpi
# real average sales tax
genr rtaxso = rtaxs - rtax
# logs of consumption, price, income
genr lpackpc = log(packpc)
genr lravgprs = log(ravgprs)
genr perinc = income / (pop*cpi)
genr lperinc = log(perinc)
# restrict sample to 1995 observations
smpl --restrict year=1995
# Equation (10.16) by tsls
list xlist = const lravgprs lperinc
list zlist = const rtaxso rtax lperinc
tsls lpackpc xlist ; zlist --robust

# setup for gmm

matrix Z = { zlist }
matrix W = inv(Z’Z)
series e = 0
scalar b0 = 1
scalar b1 = 1
scalar b2 = 1

gmm e = lpackpc - b0 - b1*lravgprs - b2*lperinc

orthog e ; Z
weights W
params b0 b1 b2
end gmm
Chapter 20. GMM estimation 167

Example 20.3: TSLS via GMM: partial output

Model 1: TSLS estimates using the 48 observations 1-48

Dependent variable: lpackpc
Instruments: rtaxso rtax
Heteroskedasticity-robust standard errors, variant HC0

VARIABLE COEFFICIENT STDERROR T STAT P-VALUE

const 9.89496 0.928758 10.654 <0.00001 ***

lravgprs -1.27742 0.241684 -5.286 <0.00001 ***
lperinc 0.280405 0.245828 1.141 0.25401

Model 2: 1-step GMM estimates using the 48 observations 1-48

e = lpackpc - b0 - b1*lravgprs - b2*lperinc

PARAMETER ESTIMATE STDERROR T STAT P-VALUE

b0 9.89496 0.928758 10.654 <0.00001 ***

b1 -1.27742 0.241684 -5.286 <0.00001 ***
b2 0.280405 0.245828 1.141 0.25401

GMM criterion = 0.0110046

This estimator is robust with respect to heteroskedasticity, but not with respect to autocorrela-
tion. A heteroskedasticity- and autocorrelation-consistent (HAC) variant can be obtained using the
Bartlett kernel or similar. A univariate version of this is used in the context of the lrvar() function
— see equation (5.1). The multivariate version is set out in equation (20.10).
 
T −k k
1 XX
Ω̂k (θ) = wi ft (θ)ft−i (θ)0  , (20.10)
T t=k i=−k

Gretl computes the HAC covariance matrix by default when a GMM model is estimated on time
series data. You can control the kernel and the bandwidth (that is, the value of k in 20.10) using
the set command. See chapter 15 for further discussion of HAC estimation. You can also ask gretl
not to use the HAC version by saying

set force_hc on

20.5 A real example: the Consumption Based Asset Pricing Model

To illustrate gretl’s implementation of GMM, we will replicate the example given in chapter 3 of
Hall (2005). The model to estimate is a classic application of GMM, and provides an example of a
case when orthogonality conditions do not stem from statistical considerations, but rather from
economic theory.
A rational individual who must allocate his income between consumption and investment in a
financial asset must in fact choose the consumption path of his whole lifetime, since investment
translates into future consumption. It can be shown that an optimal consumption path should
satisfy the following condition:

pU 0 (ct ) = δk E rt+k U 0 (ct+k )|Ft ,

 
(20.11)

where p is the asset price, U(·) is the individual’s utility function, δ is the individual’s subjective
discount rate and rt+k is the asset’s rate of return between time t and time t + k. Ft is the infor-
mation set at time t; equation (20.11) says that the utility “lost” at time t by purchasing the asset
Chapter 20. GMM estimation 168

instead of consumption goods must be matched by a corresponding increase in the (discounted)

future utility of the consumption financed by the asset’s return. Since the future is uncertain, the
individual considers his expectation, conditional on what is known at the time when the choice is
made.
We have said nothing about the nature of the asset, so equation (20.11) should hold whatever asset
we consider; hence, it is possible to build a system of equations like (20.11) for each asset whose
price we observe.
If we are willing to believe that

• the economy as a whole can be represented as a single gigantic and immortal representative
individual, and
x α −1
• the function U(x) = α is a faithful representation of the individual’s preferences,

then, setting k = 1, equation (20.11) implies the following for any asset j:
rj,t+1 Ct+1 α−1 
"    #
E δ Ft = 1, (20.12)
pj,t Ct 

where Ct is aggregate consumption and α and δ are the risk aversion and discount rate of the
representative individual. In this case, it is easy to see that the “deep” parameters α and δ can be
estimated via GMM by using
rj,t+1 Ct+1 α−1
 
et = δ −1
pj,t Ct
as the moment condition, while any variable known at time t may serve as an instrument.
In the example code given in 20.4, we replicate selected portions of table 3.7 in Hall (2005). The
variable consrat is defined as the ratio of monthly consecutive real per capita consumption (ser-
vices and nondurables) for the US, and ewr is the return–price ratio of a fictitious asset constructed
by averaging all the stocks in the NYSE. The instrument set contains the constant and two lags of
each variable.
The command set force_hc on on the second line of the script has the sole purpose of replicating
the given example: as mentioned above, it forces gretl to compute the long-run variance of the
orthogonality conditions according to equation (20.9) rather than (20.10).
We run gmm four times: one-step estimation for each of two initial weights matrices, then iterative
estimation starting from each set of initial weights. Since the number of orthogonality conditions
(5) is greater than the number of estimated parameters (2), the choice of initial weights should
make a difference, and indeed we see fairly substantial differences between the one-step estimates
(Models 1 and 2). On the other hand, iteration reduces these differences almost to the vanishing
point (Models 3 and 4).
Part of the output is given in 20.5. It should be noted that the J test leads to a rejection of the
hypothesis of correct specification. This is perhaps not surprising given the heroic assumptions
required to move from the microeconomic principle in equation (20.11) to the aggregate system
that is actually estimated.

20.6 Caveats
A few words of warning are in order: despite its ingenuity, GMM is possibly the most fragile esti-
mation method in econometrics. The number of non-obvious choices one has to make when using
GMM is high, and in finite samples each of these can have dramatic consequences on the eventual
output. Some of the factors that may affect the results are:

1. Orthogonality conditions can be written in more than one way: for example, if E(xt − µ) = 0,
then E(xt /µ − 1) = 0 holds too. It is possible that a different specification of the moment
conditions leads to different results.
Chapter 20. GMM estimation 169

Example 20.4: Estimation of the Consumption Based Asset Pricing Model

open hall.gdt
set force_hc on

scalar alpha = 0.5

scalar delta = 0.5
series e = 0

list inst = const consrat(-1) consrat(-2) ewr(-1) ewr(-2)

matrix V0 = 100000*I(nelem(inst))
matrix Z = { inst }
matrix V1 = $nobs*inv(Z’Z)

gmm e = delta*ewr*consrat^(alpha-1) - 1
orthog e ; inst
weights V0
params alpha delta
end gmm

gmm e = delta*ewr*consrat^(alpha-1) - 1
orthog e ; inst
weights V1
params alpha delta
end gmm

gmm e = delta*ewr*consrat^(alpha-1) - 1
orthog e ; inst
weights V0
params alpha delta
end gmm --iterate

gmm e = delta*ewr*consrat^(alpha-1) - 1
orthog e ; inst
weights V1
params alpha delta
end gmm --iterate
Chapter 20. GMM estimation 170

Example 20.5: Estimation of the Consumption Based Asset Pricing Model — output

Model 1: 1-step GMM estimates using the 465 observations 1959:04-1997:12

e = d*ewr*consrat^(alpha-1) - 1

PARAMETER ESTIMATE STDERROR T STAT P-VALUE

alpha -3.14475 6.84439 -0.459 0.64590

d 0.999215 0.0121044 82.549 <0.00001 ***

GMM criterion = 2778.08

Model 2: 1-step GMM estimates using the 465 observations 1959:04-1997:12

e = d*ewr*consrat^(alpha-1) - 1

PARAMETER ESTIMATE STDERROR T STAT P-VALUE

alpha 0.398194 2.26359 0.176 0.86036

d 0.993180 0.00439367 226.048 <0.00001 ***

GMM criterion = 14.247

Model 3: Iterated GMM estimates using the 465 observations 1959:04-1997:12

e = d*ewr*consrat^(alpha-1) - 1

PARAMETER ESTIMATE STDERROR T STAT P-VALUE

alpha -0.344325 2.21458 -0.155 0.87644

d 0.991566 0.00423620 234.070 <0.00001 ***

GMM criterion = 5491.78

J test: Chi-square(3) = 11.8103 (p-value 0.0081)

Model 4: Iterated GMM estimates using the 465 observations 1959:04-1997:12

e = d*ewr*consrat^(alpha-1) - 1

PARAMETER ESTIMATE STDERROR T STAT P-VALUE

alpha -0.344315 2.21359 -0.156 0.87639

d 0.991566 0.00423469 234.153 <0.00001 ***

GMM criterion = 5491.78

J test: Chi-square(3) = 11.8103 (p-value 0.0081)
Chapter 20. GMM estimation 171

2. As with all other numerical optimization algorithms, weird things may happen when the ob-
jective function is nearly flat in some directions or has multiple minima. BFGS is usually quite
good, but there is no guarantee that it always delivers a sensible solution, if one at all.

3. The 1-step and, to a lesser extent, the 2-step estimators may be sensitive to apparently trivial
details, like the re-scaling of the instruments. Different choices for the initial weights matrix
can also have noticeable consequences.

4. With time-series data, there is no hard rule on the appropriate number of lags to use when
computing the long-run covariance matrix (see section 20.4). Our advice is to go by trial and
error, since results may be greatly influenced by a poor choice. Future versions of gretl will
include more options on covariance matrix estimation.

One of the consequences of this state of things is that replicating various well-known published
studies may be extremely difficult. Any non-trivial result is virtually impossible to reproduce unless
all details of the estimation procedure are carefully recorded.
 Chapter 21

Model selection criteria

21.1 Introduction
In some contexts the econometrician chooses between alternative models based on a formal hy-
pothesis test. For example, one might choose a more general model over a more restricted one if
the restriction in question can be formulated as a testable null hypothesis, and the null is rejected
on an appropriate test.
In other contexts one sometimes seeks a criterion for model selection that somehow measures the
balance between goodness of fit or likelihood, on the one hand, and parsimony on the other. The
balancing is necessary because the addition of extra variables to a model cannot reduce the degree
of fit or likelihood, and is very likely to increase it somewhat even if the additional variables are
not truly relevant to the data-generating process.
The best known such criterion, for linear models estimated via least squares, is the adjusted R 2 ,

SSR/(n − k)
R̄ 2 = 1 −
TSS/(n − 1)

where n is the number of observations in the sample, k denotes the number of parameters esti-
mated, and SSR and TSS denote the sum of squared residuals and the total sum of squares for
the dependent variable, respectively. Compared to the ordinary coefficient of determination or
unadjusted R 2 ,
SSR
R2 = 1 −
TSS
the “adjusted” calculation penalizes the inclusion of additional parameters, other things equal.

21.2 Information criteria

A more general criterion in a similar spirit is Akaike’s (1974) “Information Criterion” (AIC). The
original formulation of this measure is

AIC = −2`(θ̂) + 2k (21.1)

where `(θ̂) represents the maximum loglikelihood as a function of the vector of parameter esti-
mates, θ̂, and k (as above) denotes the number of “independently adjusted parameters within the
model.” In this formulation, with AIC negatively related to the likelihood and positively related to
the number of parameters, the researcher seeks the minimum AIC.
The AIC can be confusing, in that several variants of the calculation are “in circulation.” For exam-
ple, Davidson and MacKinnon (2004) present a simplified version,

AIC = `(θ̂) − k

which is just −2 times the original: in this case, obviously, one wants to maximize AIC.
In the case of models estimated by least squares, the loglikelihood can be written as
n n
`(θ̂) = − (1 + log 2π − log n) − log SSR (21.2)
2 2

172
Chapter 21. Model selection criteria 173

Substituting (21.2) into (21.1) we get

AIC = n(1 + log 2π − log n) + n log SSR + 2k

which can also be written as

SSR
 
AIC = n log + 2k + n(1 + log 2π ) (21.3)
n

Some authors simplify the formula for the case of models estimated via least squares. For instance,
William Greene writes
SSR 2k
 
AIC = log + (21.4)
n n
This variant can be derived from (21.3) by dividing through by n and subtracting the constant
1 + log 2π . That is, writing AICG for the version given by Greene, we have

1
AICG = AIC − (1 + log 2π )
n

Finally, Ramanathan gives a further variant:

SSR 2k/n
 
AICR = e
n

which is the exponential of the one given by Greene.

Gretl began by using the Ramanathan variant, but since version 1.3.1 the program has used the
original Akaike formula (21.1), and more specifically (21.3) for models estimated via least squares.

Although the Akaike criterion is designed to favor parsimony, arguably it does not go far enough
in that direction. For instance, if we have two nested models with k − 1 and k parameters respec-
tively, and if the null hypothesis that parameter k equals 0 is true, in large samples the AIC will
nonetheless tend to select the less parsimonious model about 16 percent of the time (see Davidson
and MacKinnon, 2004, chapter 15).
An alternative to the AIC which avoids this problem is the Schwarz (1978) “Bayesian information
criterion” (BIC). The BIC can be written (in line with Akaike’s formulation of the AIC) as

BIC = −2`(θ̂) + k log n

The multiplication of k by log n in the BIC means that the penalty for adding extra parameters
grows with the sample size. This ensures that, asymptotically, one will not select a larger model
over a correctly specified parsimonious model.
A further alternative to AIC, which again tends to select more parsimonious models than AIC,
is the Hannan–Quinn criterion or HQC (Hannan and Quinn, 1979). Written consistently with the
formulations above, this is
HQC = −2`(θ̂) + 2k log log n
The Hannan–Quinn calculation is based on the law of the iterated logarithm (note that the last term
is the log of the log of the sample size). The authors argue that their procedure provides a “strongly
consistent estimation procedure for the order of an autoregression”, and that “compared to other
strongly consistent procedures this procedure will underestimate the order to a lesser degree.”

Gretl reports the AIC, BIC and HQC (calculated as explained above) for most sorts of models. The
key point in interpreting these values is to know whether they are calculated such that smaller
values are better, or such that larger values are better. In gretl, smaller values are better: one wants
to minimize the chosen criterion.
 Chapter 22

Time series filters

In addition to the usual application of lags and differences, gretl provides fractional differencing
and various filters commonly used in macroeconomics for trend-cycle decomposition: notably the
Hodrick–Prescott filter (Hodrick and Prescott, 1997), the Baxter–King bandpass filter (Baxter and
King, 1999) and the Butterworth filter (Butterworth, 1930).

22.1 Fractional differencing

The concept of differencing a time series d times is pretty obvious when d is an integer; it may seem
odd when d is fractional. However, this idea has a well-defined mathematical content: consider the
function
f (z) = (1 − z)−d ,
where z and d are real numbers. By taking a Taylor series expansion around z = 0, we see that

d(d + 1) 2
f (z) = 1 + dz + z + ···
2
or, more compactly,
∞
X
f (z) = 1 + ψi zi
i=1

with Qk
i=1 (d + i − 1) d+k−1
ψk = = ψk−1
k! k

The same expansion can be used with the lag operator, so that if we defined

Yt = (1 − L)0.5 Xt

this could be considered shorthand for

Yt = Xt − 0.5Xt−1 − 0.125Xt−2 − 0.0625Xt−3 − · · ·

In gretl this transformation can be accomplished by the syntax

genr Y = fracdiff(X,0.5)

22.2 The Hodrick–Prescott filter

This filter is accessed using the hpfilt() function, which takes as its first argument the name of
the variable to be processed. (A further optional argument is explained below.)
A time series yt may be decomposed into a trend or growth component gt and a cyclical component
ct .
yt = gt + ct , t = 1, 2, . . . , T

174
Chapter 22. Time series filters 175

The Hodrick–Prescott filter effects such a decomposition by minimizing the following:

T TX
−1
X
2
(yt − gt )2 + λ (gt+1 − gt ) − (gt − gt−1 ) .
t=1 t=2

The first term above is the sum of squared cyclical components ct = yt − gt . The second term is a
multiple λ of the sum of squares of the trend component’s second differences. This second term
penalizes variations in the growth rate of the trend component: the larger the value of λ, the higher
is the penalty and hence the smoother the trend series.
Note that the hpfilt function in gretl produces the cyclical component, ct , of the original series.
If you want the smoothed trend you can subtract the cycle from the original:

genr ct = hpfilt(yt)
genr gt = yt - ct

Hodrick and Prescott (1997) suggest that a value of λ = 1600 is reasonable for quarterly data. The
default value in gretl is 100 times the square of the data frequency (which, of course, yields 1600
for quarterly data). The value can be adjusted using an optional second argument to hpfilt(), as
in

genr ct = hpfilt(yt, 1300)

22.3 The Baxter and King filter

This filter is accessed using the bkfilt() function, which again takes the name of the variable to
be processed as its first argument. The operation of the filter can be controlled via three further
optional argument.
Consider the spectral representation of a time series yt :
Zπ
yt = eiω dZ(ω)
−π

To extract the component of yt that lies between the frequencies ω and ω one could apply a
bandpass filter: Zπ
ct∗ = F ∗ (ω)eiω dZ(ω)
−π
∗
where F (ω) = 1 for ω < |ω| < ω and 0 elsewhere. This would imply, in the time domain,
applying to the series a filter with an infinite number of coefficients, which is undesirable. The
Baxter and King bandpass filter applies to yt a finite polynomial in the lag operator A(L):

ct = A(L)yt

where A(L) is defined as

k
X
A(L) = ai L i
i=−k

The coefficients ai are chosen such that F (ω) = A(eiω )A(e−iω ) is the best approximation to F ∗ (ω)
for a given k. Clearly, the higher k the better the approximation is, but since 2k observations have
to be discarded, a compromise is usually sought. Moreover, the filter has also other appealing
theoretical properties, among which the property that A(1) = 0, so a series with a single unit root
is made stationary by application of the filter.
In practice, the filter is normally used with monthly or quarterly data to extract the “business
cycle” component, namely the component between 6 and 36 quarters. Usual choices for k are 8 or
Chapter 22. Time series filters 176

12 (maybe higher for monthly series). The default values for the frequency bounds are 8 and 32,
and the default value for the approximation order, k, is 8. You can adjust these values using the
full form of bkfilt(), which is
bkfilt(seriesname, f1, f2, k)
where f1 and f2 represent the lower and upper frequency bounds respectively.

22.4 The Butterworth filter

The Butterworth filter (Butterworth, 1930) is an approximation to an “ideal” square-wave filter.
The ideal filter divides the spectrum of a time series into a pass-band (frequencies less than some
chosen ω? for a low-pass filter, or frequencies greater than ω? for high-pass) and a stop-band; the
gain is 1 for the pass-band and 0 for the stop-band. The ideal filter is unattainable in practice since
it would require an infinite number of coefficients, but the Butterworth filter offers a remarkably
good approximation. This filter is derived and persuasively advocated by Pollock (2000).
For data y, the filtered sequence x is given by

x = y − λΣQ(M + λQ0 ΣQ)−1 Q0 y (22.1)

where
T −2 T
Σ = {2IT − (LT + L−1
T )} and M = {2IT + (LT + L−1
T )}

IT denotes the identity matrix of order T ; LT = [e1 , e2 , . . . , eT −1 , 0] is the finite-sample matrix

version of the lag operator; and Q is defined such that pre-multiplication of a T -vector of data by
Q0 of order (T − 2) × T produces the second differences of the data. The matrix product
T
Q0 ΣQ = {2IT − (LT + L−1
T )}

is a Toeplitz matrix.
The behavior of the Butterworth filter is governed by two parameters: the frequency cutoff ω? and
an integer order, n, which determines the number of coefficients used. The λ that appears in (22.1)
is tan(ω? /2)−2n . Higher values of n produce a better approximation to the ideal filter in principle
(i.e. a sharper cut between the pass-band and the stop-band) but there is a downside: with a greater
number of coefficients numerical instability may be an issue, and the influence of the initial values
in the sample may be exaggerated.
In gretl the Butterworth filter is implemented by the bwfilt() function,1 which takes three argu-
ments: the series to filter, the order n and the frequency cutoff, ω? , expressed in degrees. The
cutoff value must be greater than 0 and less than 180. This function operates as a low-pass filter;
for the high-pass variant, subtract the filtered series from the original, as in

series bwcycle = y - bwfilt(y, 8, 67)

Pollock recommends that the parameters of the Butterworth filter be tuned to the data: one should
examine the periodogram of the series in question (possibly after removal of a polynomial trend)
in search of a “dead spot” of low power between the frequencies one wishes to exclude and the
frequencies one wishes to retain. If ω? is placed in such a dead spot then the job of separation
can be done with a relatively small n, hence avoiding numerical problems. By way of illustration,
consider the periodogram for quarterly observations on new cars sales in the US,2 1975:1 to 1990:4
(the upper panel in Figure 22.1).
A seasonal pattern is clearly visible in the periodogram, centered at an angle of 90◦ or 4 periods.
If we set ω? = 68◦ (or thereabouts) we should be able to excise the seasonality quite cleanly using
1 The code for this filter is based on D. S. G. Pollock’s programs IDEOLOG and DETREND. The Pascal source code for

the former is available from http://www.le.ac.uk/users/dsgp1 and the C sources for the latter were kindly made
available to us by the author.
2 This is the variable QNC from the Ramanathan data file data9-7.
Chapter 22. Time series filters 177

periods
64.0 10.7 5.8 4.0 3.0 2.5 2.1

300000

250000

200000

150000

100000

50000

0
0 20 40 60 80 100 120 140 160 180
degrees

3400
QNC (original data)
3200 QNC (smoothed) 1
3000
0.8
2800
0.6
2600

2400
0.4

2200 0.2

2000 0
0 π/4 π/2 3π/4 π
1800

1600
1976 1978 1980 1982 1984 1986 1988 1990

Figure 22.1: The Butterworth filter applied

n = 8. The result is shown in the lower panel of the Figure, along with the frequency response or
gain plot for the chosen filter. Note the smooth and reasonably steep drop-off in gain centered on
the nominal cutoff of 68◦ ≈ 3π /8.
The apparatus that supports this sort of analysis in the gretl GUI can be found under the Variable
menu in the main window: the items Periodogram and Filter. In the periodogram dialog box you
have the option of expressing the frequency axis in degrees, which is helpful when selecting a
Butterworth filter; and in the Butterworth filter dialog you have the option of plotting the frequency
response as well as the smoothed series and/or the residual or cycle.
 Chapter 23

Univariate time series models

23.1 Introduction
Time series models are discussed in this chapter and the next two. Here we concentrate on ARIMA
models, unit root tests, and GARCH. The following chapter deals with VARs, and chapter 25 with
cointegration and error correction.

23.2 ARIMA models

Representation and syntax
The arma command performs estimation of AutoRegressive, Integrated, Moving Average (ARIMA)
models. These are models that can be written in the form

φ(L)yt = θ(L)t (23.1)

where φ(L), and θ(L) are polynomials in the lag operator, L, defined such that Ln xt = xt−n , and
t is a white noise process. The exact content of yt , of the AR polynomial φ(), and of the MA
polynomial θ(), will be explained in the following.

Mean terms
The process yt as written in equation (23.1) has, without further qualifications, mean zero. If the
model is to be applied to real data, it is necessary to include some term to handle the possibility
that yt has non-zero mean. There are two possible ways to represent processes with nonzero
mean: one is to define µt as the unconditional mean of yt , namely the central value of its marginal
distribution. Therefore, the series ỹt = yt − µt has mean 0, and the model (23.1) applies to ỹt . In
practice, assuming that µt is a linear function of some observable variables xt , the model becomes

φ(L)(yt − xt β) = θ(L)t (23.2)

This is sometimes known as a “regression model with ARMA errors”; its structure may be more
apparent if we represent it using two equations:

yt = xt β + ut
φ(L)ut = θ(L)t

The model just presented is also sometimes known as “ARMAX” (ARMA + eXogenous variables). It
seems to us, however, that this label is more appropriately applied to a different model: another
way to include a mean term in (23.1) is to base the representation on the conditional mean of yt ,
that is the central value of the distribution of yt given its own past. Assuming, again, that this can
be represented as a linear combination of some observable variables zt , the model would expand
to
φ(L)yt = zt γ + θ(L)t (23.3)
The formulation (23.3) has the advantage that γ can be immediately interpreted as the vector of
marginal effects of the zt variables on the conditional mean of yt . And by adding lags of zt to

178
Chapter 23. Univariate time series models 179

this specification one can estimate Transfer Function models (which generalize ARMA by adding
the effects of exogenous variable distributed across time).
Gretl provides a way to estimate both forms. Models written as in (23.2) are estimated by maximum
likelihood; models written as in (23.3) are estimated by conditional maximum likelihood. (For more
on these options see the section on “Estimation” below.)
In the special case when xt = zt = 1 (that is, the models include a constant but no exogenous
variables) the two specifications discussed above reduce to

φ(L)(yt − µ) = θ(L)t (23.4)

and
φ(L)yt = α + θ(L)t (23.5)
respectively. These formulations are essentially equivalent, but if they represent one and the same
process µ and α are, fairly obviously, not numerically identical; rather
 
α = 1 − φ1 − . . . − φp µ

The gretl syntax for estimating (23.4) is simply

arma p q ; y

The AR and MA lag orders, p and q, can be given either as numbers or as pre-defined scalars.
The parameter µ can be dropped if necessary by appending the option --nc (“no constant”) to the
command. If estimation of (23.5) is needed, the switch --conditional must be appended to the
command, as in

arma p q ; y --conditional

Generalizing this principle to the estimation of (23.2) or (23.3), you get that

arma p q ; y const x1 x2

would estimate the following model:

 
yt − xt β = φ1 yt−1 − xt−1 β + . . . + φp yt−p − xt−p β + t + θ1 t−1 + . . . + θq t−q

where in this instance xt β = β0 + xt,1 β1 + xt,2 β2 . Appending the --conditional switch, as in

arma p q ; y const x1 x2 --conditional

would estimate the following model:

yt = xt γ + φ1 yt−1 + . . . + φp yt−p + t + θ1 t−1 + . . . + θq t−q

Ideally, the issue broached above could be made moot by writing a more general specification that
nests the alternatives; that is


φ(L) yt − xt β = zt γ + θ(L)t ; (23.6)

we would like to generalize the arma command so that the user could specify, for any estimation
method, whether certain exogenous variables should be treated as xt s or zt s, but we’re not yet at
that point (and neither are most other software packages).
Chapter 23. Univariate time series models 180

Seasonal models
A more flexible lag structure is desirable when analyzing time series that display strong seasonal
patterns. Model (23.1) can be expanded to

φ(L)Φ(Ls )yt = θ(L)Θ(Ls )t . (23.7)

For such cases, a fuller form of the syntax is available, namely,

arma p q ; P Q ; y

where p and q represent the non-seasonal AR and MA orders, and P and Q the seasonal orders. For
example,

arma 1 1 ; 1 1 ; y

would be used to estimate the following model:

(1 − φL)(1 − ΦLs )(yt − µ) = (1 + θL)(1 + ΘLs )t

If yt is a quarterly series (and therefore s = 4), the above equation can be written more explicitly as

yt − µ = φ(yt−1 − µ) + Φ(yt−4 − µ) − (φ · Φ)(yt−5 − µ) + t + θt−1 + Θt−4 + (θ · Θ)t−5

Such a model is known as a “multiplicative seasonal ARMA model”.

Gaps in the lag structure

The standard way to specify an ARMA model in gretl is via the AR and MA orders, p and q respec-
tively. In this case all lags from 1 to the given order are included. In some cases one may wish to
include only certain specific AR and/or MA lags. This can be done in either of two ways.

• One can construct a matrix containing the desired lags (positive integer values) and supply
the name of this matrix in place of p or q.

• One can give a space-separated list of lags, enclosed in braces, in place of p or q.

The following code illustrates these options:

matrix pvec = {1, 4}

arma pvec 1 ; y
arma {1 4} 1 ; y

Both forms above specify an ARMA model in which AR lags 1 and 4 are used (but not 2 and 3).
This facility is available only for the non-seasonal component of the ARMA specification.

Differencing and ARIMA

The above discussion presupposes that the time series yt has already been subjected to all the
transformations deemed necessary for ensuring stationarity (see also section 23.3). Differencing is
the most common of these transformations, and gretl provides a mechanism to include this step
into the arma command: the syntax

arma p d q ; y

would estimate an ARMA(p, q) model on ∆d yt . It is functionally equivalent to

Chapter 23. Univariate time series models 181

series tmp = y
loop i=1..d
tmp = diff(tmp)
endloop
arma p q ; tmp

except with regard to forecasting after estimation (see below).

When the series yt is differenced before performing the analysis the model is known as ARIMA (“I”
for Integrated); for this reason, gretl provides the arima command as an alias for arma.
Seasonal differencing is handled similarly, with the syntax

arma p d q ; P D Q ; y

where D is the order for seasonal differencing. Thus, the command

arma 1 0 0 ; 1 1 1 ; y

would produce the same parameter estimates as

genr dsy = sdiff(y)

arma 1 0 ; 1 1 ; dsy

where we use the sdiff function to create a seasonal difference (e.g. for quarterly data, yt − yt−4 ).
In specifying an ARIMA model with exogenous regressors we face a choice which relates back to the
discussion of the variant models (23.2) and (23.3) above. If we choose model (23.2), the “regression
model with ARMA errors”, how should this be extended to the case of ARIMA? The issue is whether
or not the differencing that is applied to the dependent variable should also be applied to the
regressors. Consider the simplest case, ARIMA with non-seasonal differencing of order 1. We may
estimate either
φ(L)(1 − L)(yt − Xt β) = θ(L)t (23.8)
or

φ(L) (1 − L)yt − Xt β = θ(L)t (23.9)
The first of these formulations can be described as a regression model with ARIMA errors, while the
second preserves the levels of the X variables. As of gretl version 1.8.6, the default model is (23.8),
in which differencing is applied to both yt and Xt . However, when using the default estimation
method (native exact ML, see below), the option --y-diff-only may be given, in which case gretl
estimates (23.9).1

Estimation
The default estimation method for ARMA models is exact maximum likelihood estimation (under
the assumption that the error term is normally distributed), using the Kalman filter in conjunc-
tion with the BFGS maximization algorithm. The gradient of the log-likelihood with respect to the
parameter estimates is approximated numerically. This method produces results that are directly
comparable with many other software packages. The constant, and any exogenous variables, are
treated as in equation (23.2). The covariance matrix for the parameters is computed using a nu-
merical approximation to the Hessian at convergence.
The alternative method, invoked with the --conditional switch, is conditional maximum likeli-
hood (CML), also known as “conditional sum of squares” (see Hamilton, 1994, p. 132). This method
was exemplified in the script 9.3, and only a brief description will be given here. Given a sample of
size T , the CML method minimizes the sum of squared one-step-ahead prediction errors generated
1 Prior to gretl 1.8.6, the default model was (23.9). We changed this for the sake of consistency with other software.
Chapter 23. Univariate time series models 182

by the model for the observations t0 , . . . , T . The starting point t0 depends on the orders of the AR
polynomials in the model. The numerical maximization method used is BHHH, and the covariance
matrix is computed using a Gauss–Newton regression.
The CML method is nearly equivalent to maximum likelihood under the hypothesis of normality;
the difference is that the first (t0 − 1) observations are considered fixed and only enter the like-
lihood function as conditioning variables. As a consequence, the two methods are asymptotically
equivalent under standard conditions — except for the fact, discussed above, that our CML imple-
mentation treats the constant and exogenous variables as per equation (23.3).
The two methods can be compared as in the following example

open data10-1
arma 1 1 ; r
arma 1 1 ; r --conditional

which produces the estimates shown in Table 23.1. As you can see, the estimates of φ and θ are
quite similar. The reported constants differ widely, as expected — see the discussion following
equations (23.4) and (23.5). However, dividing the CML constant by 1 − φ we get 7.38, which is not
far from the ML estimate of 6.93.

Table 23.1: ML and CML estimates

Parameter ML CML
µ 6.93042 (0.923882) 1.07322 (0.488661)
φ 0.855360 (0.0511842) 0.852772 (0.0450252)
θ 0.588056 (0.0986096) 0.591838 (0.0456662)

Convergence and initialization

The numerical methods used to maximize the likelihood for ARMA models are not guaranteed
to converge. Whether or not convergence is achieved, and whether or not the true maximum of
the likelihood function is attained, may depend on the starting values for the parameters. Gretl
employs one of the following two initialization mechanisms, depending on the specification of the
model and the estimation method chosen.

1. Estimate a pure AR model by Least Squares (nonlinear least squares if the model requires
it, otherwise OLS). Set the AR parameter values based on this regression and set the MA
parameters to a small positive value (0.0001).
2. The Hannan–Rissanen method: First estimate an autoregressive model by OLS and save the
residuals. Then in a second OLS pass add appropriate lags of the first-round residuals to the
model, to obtain estimates of the MA parameters.

To see the details of the ARMA estimation procedure, add the --verbose option to the command.
This prints a notice of the initialization method used, as well as the parameter values and log-
likelihood at each iteration.
Besides the built-in initialization mechanisms, the user has the option of specifying a set of starting
values manually. This is done via the set command: the first argument should be the keyword
initvals and the second should be the name of a pre-specified matrix containing starting values.
For example

matrix start = { 0, 0.85, 0.34 }

set initvals start
arma 1 1 ; y
Chapter 23. Univariate time series models 183

The specified matrix should have just as many parameters as the model: in the example above
there are three parameters, since the model implicitly includes a constant. The constant, if present,
is always given first; otherwise the order in which the parameters are expected is the same as the
order of specification in the arma or arima command. In the example the constant is set to zero,
φ1 to 0.85, and θ1 to 0.34.
You can get gretl to revert to automatic initialization via the command set initvals auto.
Two variants of the BFGS algorithm are available in gretl. In general we recommend the default vari-
ant, which is based on an implementation by Nash (1990), but for some problems the alternative,
limited-memory version (L-BFGS-B, see Byrd et al., 1995) may increase the chances of convergence
on the ML solution. This can be selected via the --lbfgs option to the arma command.

Estimation via X-12-ARIMA

As an alternative to estimating ARMA models using “native” code, gretl offers the option of using
the external program X-12-ARIMA. This is the seasonal adjustment software produced and main-
tained by the U.S. Census Bureau; it is used for all official seasonal adjustments at the Bureau.
Gretl includes a module which interfaces with X-12-ARIMA: it translates arma commands using the
syntax outlined above into a form recognized by X-12-ARIMA, executes the program, and retrieves
the results for viewing and further analysis within gretl. To use this facility you have to install
X-12-ARIMA separately. Packages for both MS Windows and GNU/Linux are available from the gretl
website, http://gretl.sourceforge.net/.
To invoke X-12-ARIMA as the estimation engine, append the flag --x-12-arima, as in

arma p q ; y --x-12-arima

As with native estimation, the default is to use exact ML but there is the option of using conditional
ML with the --conditional flag. However, please note that when X-12-ARIMA is used in conditional
ML mode, the comments above regarding the variant treatments of the mean of the process yt do
not apply. That is, when you use X-12-ARIMA the model that is estimated is (23.2), regardless
of whether estimation is by exact ML or conditional ML. In addition, the treatment of exogenous
regressors in the context of ARIMA differencing is always that shown in equation (23.8).

Forecasting
ARMA models are often used for forecasting purposes. The autoregressive component, in particu-
lar, offers the possibility of forecasting a process “out of sample” over a substantial time horizon.
Gretl supports forecasting on the basis of ARMA models using the method set out by Box and
Jenkins (1976).2 The Box and Jenkins algorithm produces a set of integrated AR coefficients which
take into account any differencing of the dependent variable (seasonal and/or non-seasonal) in the
ARIMA context, thus making it possible to generate a forecast for the level of the original variable.
By contrast, if you first difference a series manually and then apply ARMA to the differenced series,
forecasts will be for the differenced series, not the level. This point is illustrated in Example 23.1.
The parameter estimates are identical for the two models. The forecasts differ but are mutually
consistent: the variable fcdiff emulates the ARMA forecast (static, one step ahead within the
sample range, and dynamic out of sample).
2 See in particular their “Program 4” on p. 505ff.
Chapter 23. Univariate time series models 184

Example 23.1: ARIMA forecasting

open greene18_2.gdt
# log of quarterly U.S. nominal GNP, 1950:1 to 1983:4
genr y = log(Y)
# and its first difference
genr dy = diff(y)
# reserve 2 years for out-of-sample forecast
smpl ; 1981:4
# Estimate using ARIMA
arima 1 1 1 ; y
# forecast over full period
smpl --full
fcast fc1
# Return to sub-sample and run ARMA on the first difference of y
smpl ; 1981:4
arma 1 1 ; dy
smpl --full
fcast fc2
genr fcdiff = (t<=1982:1)? (fc1 - y(-1)) : (fc1 - fc1(-1))
# compare the forecasts over the later period
smpl 1981:1 1983:4
print y fc1 fc2 fcdiff --byobs

The output from the last command is:

y fc1 fc2 fcdiff
1981:1 7.964086 7.940930 0.02668 0.02668
1981:2 7.978654 7.997576 0.03349 0.03349
1981:3 8.009463 7.997503 0.01885 0.01885
1981:4 8.015625 8.033695 0.02423 0.02423
1982:1 8.014997 8.029698 0.01407 0.01407
1982:2 8.026562 8.046037 0.01634 0.01634
1982:3 8.032717 8.063636 0.01760 0.01760
1982:4 8.042249 8.081935 0.01830 0.01830
1983:1 8.062685 8.100623 0.01869 0.01869
1983:2 8.091627 8.119528 0.01891 0.01891
1983:3 8.115700 8.138554 0.01903 0.01903
1983:4 8.140811 8.157646 0.01909 0.01909
Chapter 23. Univariate time series models 185

23.3 Unit root tests

The ADF test
The Augmented Dickey–Fuller (ADF) test is, as implemented in gretl, the t-statistic on ϕ in the
following regression:
p
X
∆yt = µt + ϕyt−1 + γi ∆yt−i + t . (23.10)
i=1

This test statistic is probably the best-known and most widely used unit root test. It is a one-sided
test whose null hypothesis is ϕ = 0 versus the alternative ϕ < 0 (and hence large negative values
of the test statistic lead to the rejection of the null). Under the null, yt must be differenced at least
once to achieve stationarity; under the alternative, yt is already stationary and no differencing is
required.
One peculiar aspect of this test is that its limit distribution is non-standard under the null hy-
pothesis: moreover, the shape of the distribution, and consequently the critical values for the test,
depends on the form of the µt term. A full analysis of the various cases is inappropriate here:
Hamilton (1994) contains an excellent discussion, but any recent time series textbook covers this
topic. Suffice it to say that gretl allows the user to choose the specification for µt among four
different alternatives:

µt command option
0 --nc
µ0 --c
µ0 + µ1 t --ct
2
µ0 + µ1 t + µ1 t --ctt

These option flags are not mutually exclusive; when they are used together the statistic will be
reported separately for each selected case. By default, gretl uses the combination --c --ct. For
each case, approximate p-values are calculated by means of the algorithm developed in MacKinnon
(1996).
The gretl command used to perform the test is adf; for example

adf 4 x1

would compute the test statistic as the t-statistic for ϕ in equation 23.10 with p = 4 in the two
cases µt = µ0 and µt = µ0 + µ1 t.
The number of lags (p in equation 23.10) should be chosen as to ensure that (23.10) is a para-
metrization flexible enough to represent adequately the short-run persistence of ∆yt . Setting p
too low results in size distortions in the test, whereas setting p too high leads to low power. As
a convenience to the user, the parameter p can be automatically determined. Setting p to a neg-
ative number triggers a sequential procedure that starts with p lags and decrements p until the
t-statistic for the parameter γp exceeds 1.645 in absolute value.

The ADF-GLS test

Elliott, Rothenberg and Stock (1996) proposed a variant of the ADF test which involves an alterna-
tive method of handling the parameters pertaining to the deterministic term µt : these are estimated
first via Generalized Least Squares, and in a second stage an ADF regression is performed using the
GLS residuals. This variant offers greater power than the regular ADF test for the cases µt = µ0 and
µt = µ0 + µ1 t.
The ADF-GLS test is available in gretl via the --gls option to the adf command. When this option
is selected the --nc and --ctt options become unavailable, and only one case can be selected at
Chapter 23. Univariate time series models 186

a time; by default the constant-only model is used but a trend can be added using the --ct flag.
When a trend is present in this test MacKinnon-type p-values are not available; instead we show
critical values from Table 1 in Elliott et al. (1996).

The KPSS test

The KPSS test (Kwiatkowski, Phillips, Schmidt and Shin, 1992) is a unit root test in which the null
hypothesis is opposite to that in the ADF test: under the null, the series in question is stationary;
the alternative is that the series is I(1).
The basic intuition behind this test statistic is very simple: if yt can be written as yt = µ + ut ,
where ut is some zero-mean stationary process, then not only does the sample average of the yt s
provide a consistent estimator of µ, but the long-run variance of ut is a well-defined, finite number.
Neither of these properties hold under the alternative.
The test itself is based on the following statistic:
PT 2
i=1 St
η= (23.11)
T 2 σ̄ 2
Pt
where St = s=1 es and σ̄ 2 is an estimate of the long-run variance of et = (yt − ȳ). Under the null,
this statistic has a well-defined (nonstandard) asymptotic distribution, which is free of nuisance
parameters and has been tabulated by simulation. Under the alternative, the statistic diverges.
As a consequence, it is possible to construct a one-sided test based on η, where H0 is rejected if
η is bigger than the appropriate critical value; gretl provides the 90, 95 and 99 percent quantiles.
The critical values are computed via the method presented by Sephton (1995), which offers greater
accuracy than the values tabulated in Kwiatkowski et al. (1992).
Usage example:

kpss m y

where m is an integer representing the bandwidth or window size used in the formula for estimating
the long run variance:
m 
|i|
X 
σ̄ 2 = 1− γ̂i
i=−m
m+1

The γ̂i terms denote the empirical autocovariances of et from order −m through m. For this
estimator to be consistent, m must be large enough to accommodate the short-run persistence of
et , but not too large compared to the sample size T . If the supplied m is non-positive a default value
 1/4
T
is computed, namely the integer part of 4 100 .
The above concept can be generalized to the case where yt is thought to be stationary around a
deterministic trend. In this case, formula (23.11) remains unchanged, but the series et is defined as
the residuals from an OLS regression of yt on a constant and a linear trend. This second form of
the test is obtained by appending the --trend option to the kpss command:

kpss n y --trend

Note that in this case the asymptotic distribution of the test is different and the critical values
reported by gretl differ accordingly.

Panel unit root tests

The most commonly used unit root tests for panel data involve a generalization of the ADF pro-
cedure, in which the joint null hypothesis is that a given times series is non-stationary for all
individuals in the panel.
Chapter 23. Univariate time series models 187

In this context the ADF regression (23.10) can be rewritten as

pi
X
∆yit = µit + ϕi yi,t−1 + γij ∆yi,t−j + it (23.12)
j=1

The model (23.12) allows for maximal heterogeneity across the individuals in the panel: the pa-
rameters of the deterministic term, the autoregressive coefficient ϕ, and the lag order p are all
specific to the individual, indexed by i.
One possible modification of this model is to impose the assumption that ϕi = ϕ for all i; that is,
the individual time series share a common autoregressive root (although they may differ in respect
of other statistical properties). The choice of whether or not to impose this assumption has an
important bearing on the hypotheses under test. Under model (23.12) the joint null is ϕi = 0 for
all i, meaning that all the individual time series are non-stationary, and the alternative (simply the
negation of the null) is that at least one individual time series is stationary. When a common ϕ is
assumed, the null is that ϕ = 0 and the alternative is that ϕ < 0. The null still says that all the
individual series are non-stationary, but the alternative now says that they are all stationary. The
choice of model should take this point into account, as well as the gain in power from forming a
pooled estimate of ϕ and, of course, the plausibility of assuming a common AR(1) coefficient.3
In gretl, the formulation (23.12) is used automatically when the adf command is used on panel
data. The joint test statistic is formed using the method of Im, Pesaran and Shin (2003). In this
context the behavior of adf differs from regular time-series data: only one case of the deterministic
term is handled per invocation of the command; the default is that µit includes just a constant but
the --nc and --ct flags can be used to suppress the constant or to include a trend, respectively;
and the quadratic trend option --ctt is not available.
The alternative that imposes a common value of ϕ is implemented via the levinlin command.
The test statistic is computed as per Levin, Lin and Chu (2002). As with the adf command, the first
argument is the lag order and the second is the name of the series to test; and the default case for
the deterministic component is a constant only. The options --nc and --ct have the same effect
as with adf. One refinement is that the lag order may be given in either of two forms: if a scalar
is given, this is taken to represent a common value of p for all individuals, but you may instead
provide a vector holding a set of pi values, hence allowing the order of autocorrelation of the series
to differ by individual. So, for example, given

levinlin 2 y
levinlin {2,2,3,3,4,4} y

the first command runs a joint ADF test with a common lag order of 2, while the second (which
assumes a panel with six individuals) allows for differing short-run dynamics. The first argument
to levinlin can be given as a set of comma-separated integers enclosed in braces, as shown above,
or as the name of an appropriately dimensioned pre-defined matrix (see chapter 13).
Besides variants of the ADF test, the KPSS test also can be used with panel data via the kpss
command. In this case the test (of the null hypothesis that the given time series is stationary for
all individuals) is implemented using the method of Choi (2001). This is an application of meta-
analysis, the statistical technique whereby an overall or composite p-value for the test of a given
null hypothesis can be computed from the p-values of a set of separate tests. Unfortunately, in
the case of the KPSS test we are limited by the unavailability of precise p-values, although if an
individual test statistic falls between the 10 percent and 1 percent critical values we are able to
interpolate with a fair degree of confidence. This gives rise to four cases.

1. All the individual KPSS test statistics fall between the 10 percent and 1 percent critical values:
the Choi method gives us a plausible composite p-value.
3 If the assumption of a common ϕ seems excessively restrictive, bear in mind that we routinely assume common slope

coefficients when estimating panel models, even if this is unlikely to be literally true.
Chapter 23. Univariate time series models 188

2. Some of the KPSS test statistics exceed the 1 percent value and none fall short of the 10
percent value: we can give an upper bound for the composite p-value by setting the unknown
p-values to 0.01.

3. Some of the KPSS test statistics fall short of the 10 percent critical value but none exceed the
1 percent value: we can give a lower bound to the composite p-value by setting the unknown
p-values to 0.10.

4. None of the above conditions are satisfied: the Choi method fails to produce any result for
the composite KPSS test.

23.4 Cointegration tests

The generally recommended test for cointegration is the Johansen test, which is discussed in detail
in chapter 25. In this context we offer a few remarks on the cointegration test of Engle and Granger
(1987), which builds on the ADF test discussed above (section 23.3).
For the Engle–Granger test, the procedure is:

1. Test each series for a unit root using an ADF test.

2. Run a “cointegrating regression” via OLS. For this we select one of the potentially cointegrated
variables as dependent, and include the other potentially cointegrated variables as regressors.

3. Perform an ADF test on the residuals from the cointegrating regression.

The idea is that cointegration is supported if (a) the null of non-stationarity is not rejected for each
of the series individually, in step 1, while (b) the null is rejected for the residuals at step 3. That is,
each of the individual series is I(1) but some linear combination of the series is I(0).
This test is implemented in gretl by the coint command, which requires an integer lag order
(for the ADF tests) followed by a list of variables to be tested, the first of which will be taken
as dependent in the cointegrating regression. Please see the online help for coint, or the Gretl
Command Reference, for further details.

23.5 ARCH and GARCH

Heteroskedasticity means a non-constant variance of the error term in a regression model. Autore-
gressive Conditional Heteroskedasticity (ARCH) is a phenomenon specific to time series models,
whereby the variance of the error displays autoregressive behavior; for instance, the time series ex-
hibits successive periods where the error variance is relatively large, and successive periods where
it is relatively small. This sort of behavior is reckoned to be common in asset markets: an unsettling
piece of news can lead to a period of increased volatility in the market.
An ARCH error process of order q can be represented as
q
X
ut = σt εt ; σt2 ≡ E(u2t |Ωt−1 ) = α0 + αi u2t−i
i=1

where the εt s are independently and identically distributed (iid) with mean zero and variance 1,
and where σt is taken to be the positive square root of σt2 . Ωt−1 denotes the information set as of
time t − 1 and σt2 is the conditional variance: that is, the variance conditional on information dated
t − 1 and earlier.
It is important to notice the difference between ARCH and an ordinary autoregressive error process.
The simplest (first-order) case of the latter can be written as

ut = ρut−1 + εt ; −1 < ρ < 1

Chapter 23. Univariate time series models 189

where the εt s are independently and identically distributed with mean zero and variance σ 2 . With
an AR(1) error, if ρ is positive then a positive value of ut will tend to be followed by a positive
ut+1 . With an ARCH error process, a disturbance ut of large absolute value will tend to be followed
by further large absolute values, but with no presumption that the successive values will be of the
same sign. ARCH in asset prices is a “stylized fact” and is consistent with market efficiency; on the
other hand autoregressive behavior of asset prices would violate market efficiency.
One can test for ARCH of order q in the following way:

1. Estimate the model of interest via OLS and save the squared residuals, û2t .

2. Perform an auxiliary regression in which the current squared residual is regressed on a con-
stant and q lags of itself.

3. Find the T R 2 value (sample size times unadjusted R 2 ) for the auxiliary regression.

4. Refer the T R 2 value to the χ 2 distribution with q degrees of freedom, and if the p-value is
“small enough” reject the null hypothesis of homoskedasticity in favor of the alternative of
ARCH(q).

This test is implemented in gretl via the modtest command with the --arch option, which must
follow estimation of a time-series model by OLS (either a single-equation model or a VAR). For
example,

ols y 0 x
modtest 4 --arch

This example specifies an ARCH order of q = 4; if the order argument is omitted, q is set equal to
the periodicity of the data. In the graphical interface, the ARCH test is accessible from the “Tests”
menu in the model window (again, for single-equation OLS or VARs).

GARCH
The simple ARCH(q) process is useful for introducing the general concept of conditional het-
eroskedasticity in time series, but it has been found to be insufficient in empirical work. The
dynamics of the error variance permitted by ARCH(q) are not rich enough to represent the patterns
found in financial data. The generalized ARCH or GARCH model is now more widely used.
The representation of the variance of a process in the GARCH model is somewhat (but not exactly)
analogous to the ARMA representation of the level of a time series. The variance at time t is allowed
to depend on both past values of the variance and past values of the realized squared disturbance,
as shown in the following system of equations:

yt = Xt β + ut (23.13)
ut = σt εt (23.14)
q p
X X
σt2 = α0 + αi u2t−i + 2
δj σt−j (23.15)
i=1 j=1

As above, εt is an iid sequence with unit variance. Xt is a matrix of regressors (or in the simplest
case, just a vector of 1s allowing for a non-zero mean of yt ). Note that if p = 0, GARCH collapses
to ARCH(q): the generalization is embodied in the δj terms that multiply previous values of the
error variance.
In principle the underlying innovation, εt , could follow any suitable probability distribution, and
besides the obvious candidate of the normal or Gaussian distribution the Student’s t distribution
has been used in this context. Currently gretl only handles the case where εt is assumed to be
Gaussian. However, when the --robust option to the garch command is given, the estimator gretl
Chapter 23. Univariate time series models 190

uses for the covariance matrix can be considered Quasi-Maximum Likelihood even with non-normal
disturbances. See below for more on the options regarding the GARCH covariance matrix.
Example:

garch p q ; y const x

where p ≥ 0 and q > 0 denote the respective lag orders as shown in equation (23.15). These values
can be supplied in numerical form or as the names of pre-defined scalar variables.

GARCH estimation
Estimation of the parameters of a GARCH model is by no means a straightforward task. (Consider
equation 23.15: the conditional variance at any point in time, σt2 , depends on the conditional
variance in earlier periods, but σt2 is not observed, and must be inferred by some sort of Maximum
Likelihood procedure.) By default gretl uses native code that employs the BFGS maximizer; you
also have the option (activated by the --fcp command-line switch) of using the method proposed
by Fiorentini et al. (1996),4 which was adopted as a benchmark in the study of GARCH results
by McCullough and Renfro (1998). It employs analytical first and second derivatives of the log-
likelihood, and uses a mixed-gradient algorithm, exploiting the information matrix in the early
iterations and then switching to the Hessian in the neighborhood of the maximum likelihood. (This
progress can be observed if you append the --verbose option to gretl’s garch command.)
Several options are available for computing the covariance matrix of the parameter estimates in
connection with the garch command. At a first level, one can choose between a “standard” and a
“robust” estimator. By default, the Hessian is used unless the --robust option is given, in which
case the QML estimator is used. A finer choice is available via the set command, as shown in
Table 23.2.

Table 23.2: Options for the GARCH covariance matrix

command effect
set garch_vcv hessian Use the Hessian
set garch_vcv im Use the Information Matrix
set garch_vcv op Use the Outer Product of the Gradient
set garch_vcv qml QML estimator
set garch_vcv bw Bollerslev–Wooldridge “sandwich” estimator

It is not uncommon, when one estimates a GARCH model for an arbitrary time series, to find that
the iterative calculation of the estimates fails to converge. For the GARCH model to make sense,
there are strong restrictions on the admissible parameter values, and it is not always the case
that there exists a set of values inside the admissible parameter space for which the likelihood is
maximized.
The restrictions in question can be explained by reference to the simplest (and much the most
common) instance of the GARCH model, where p = q = 1. In the GARCH(1, 1) model the conditional
variance is
σt2 = α0 + α1 u2t−1 + δ1 σt−1
2
(23.16)
Taking the unconditional expectation of (23.16) we get

σ 2 = α0 + α1 σ 2 + δ1 σ 2
4 The algorithm is based on Fortran code deposited in the archive of the Journal of Applied Econometrics by the authors,

and is used by kind permission of Professor Fiorentini.

Chapter 23. Univariate time series models 191

so that
α0
σ2 =
1 − α1 − δ 1
For this unconditional variance to exist, we require that α1 + δ1 < 1, and for it to be positive we
require that α0 > 0.
A common reason for non-convergence of GARCH estimates (that is, a common reason for the non-
existence of αi and δi values that satisfy the above requirements and at the same time maximize
the likelihood of the data) is misspecification of the model. It is important to realize that GARCH, in
itself, allows only for time-varying volatility in the data. If the mean of the series in question is not
constant, or if the error process is not only heteroskedastic but also autoregressive, it is necessary
to take this into account when formulating an appropriate model. For example, it may be necessary
to take the first difference of the variable in question and/or to add suitable regressors, Xt , as in
(23.13).
 Chapter 24

Vector Autoregressions

Gretl provides a standard set of procedures for dealing with the multivariate time-series models
known as VARs (Vector AutoRegression). More general models — such as VARMAs, nonlinear mod-
els or multivariate GARCH models — are not provided as of now, although it is entirely possible
to estimate them by writing custom procedures in the gretl scripting language. In this chapter, we
will briefly review gretl’s VAR toolbox.

24.1 Notation
A VAR is a structure whose aim is to model the time persistence of a vector of n time series, yt ,
via a multivariate autoregression, as in

yt = A1 yt−1 + A2 yt−2 + · · · + Ap yt−p + Bxt + t (24.1)

The number of lags p is called the order of the VAR. The vector xt , if present, contains a set of
exogenous variables, often including a constant, possibly with a time trend and seasonal dummies.
The vector t is typically assumed to be a vector white noise, with covariance matrix Σ.
Equation (24.1) can be written more compactly as

A(L)yt = Bxt + t (24.2)

where A(L) is a matrix polynomial in the lag operator, or as

       
yt yt−1 B t
yt−1  = A  yt−2
  0
 xt +  0
       
     
 +  (24.3)

 ··· 

 ···

  ···
 


 ···



yt−p−1 yt−p 0 0

The matrix A is known as the “companion matrix” and equals

 
A1 A2 ··· Ap
 I 0 ··· 0 
 
A= 0
 
 I ··· 0 
.. .. .. ..
 
. . . .

Equation (24.3) is known as the “companion form” of the VAR.

Another representation of interest is the so-called “VMA representation”, which is written in terms
of an infinite series of matrices Θi defined as

∂yt
Θi = (24.4)
∂t−i

The Θi matrices may be derived by recursive substitution in equation (24.1): for example, assuming
for simplicity that B = 0 and p = 1, equation (24.1) would become

yt = Ayt−1 + t

192
Chapter 24. Vector Autoregressions 193

which could be rewritten as

yt = An+1 yt−n−1 + t + At−1 + A2 t−2 + · · · + An t−n

In this case Θi = Ai . In general, it is possible to compute Θi as the n × n north-west block of the

i-th power of the companion matrix A (so Θ0 is always an identity matrix).
The VAR is said to be stable if all the eigenvalues of the companion matrix A are smaller than 1
in absolute value, or equivalently, if the matrix polynomial A(L) in equation (24.2) is such that
|A(z)| = 0 implies |z| > 1. If this is the case, limn→∞ Θn = 0 and the vector yt is stationary; as a
consequence, the equation
∞
X
yt − E(yt ) = Θi t−i (24.5)
i=0

is a legitimate Wold representation.

If the VAR is not stable, then the inferential procedures that are called for become somewhat more
specialized, except for some simple cases. In particular, if the number of eigenvalues of A with
modulus 1 is between 1 and n − 1, the canonical tool to deal with these models is the cointegrated
VAR model, discussed in chapter 25.

24.2 Estimation
The gretl command for estimating a VAR is var which, in the command line interface, is invoked
in the following manner:

[ modelname <- ] var p Ylist [; Xlist]

where p is a scalar (the VAR order) and Ylist is a list of variables describing the content of yt . If
the list Xlist is absent, the vector xt is understood to contain a constant only; if present, must be
separated from Ylist by a semi-colon and contains the other exogenous variables. Note, however,
that a few common choices can be obtained in a simpler way via options: the options gretl provides
are --trend, --seasonals and --nc (no constant). Either Ylist and Xlist may be named lists
(see section 12.1). The “<-” construct can be used to store the model under a name (see section
3.2), if so desired. To estimate a VAR using the graphical interface, choose “Time Series, Vector
Autoregression”, under the Model menu.
The parameters in eq. (24.1) are typically free from restrictions, which implies that multivariate
OLS provides a consistent and asymptotically efficient estimator of all the parameters.1 Given
the simplicity of OLS, this is what every software package, including gretl, uses: example script
24.1 exemplifies the fact that the var command gives you exactly the output you would have
from a battery of OLS regressions. The advantage of using the dedicated command is that, after
estimation is done, it makes it much easier to access certain quantities and manage certain tasks.
For example, the $coeff accessor returns the estimated coefficients as a matrix with n columns
and $sigma returns an estimate of the matrix Σ, the covariance matrix of t .
Moreover, for each variable in the system an F test is automatically performed, in which the null hy-
pothesis is that no lags of variable j are significant in the equation for variable i. This is commonly
known as a Granger causality test.
In addition, two accessors become available for the companion matrix ($compan) and the VMA rep-
resentation ($vma). The latter deserves a detailed description: since the VMA representation (24.5)
is of infinite order, gretl defines a horizon up to which the Θi matrices are computed automatically.
By default, this is a function of the periodicity of the data (see table 24.1), but it can be set by the
user to any desired value via the set command with the horizon parameter, as in
1 Infact, under normality of t OLS is indeed the conditional ML estimator. You may want to use other methods if you
need to estimate a VAR in which some parameters are constrained.
Chapter 24. Vector Autoregressions 194

Example 24.1: Estimation of a VAR via OLS

Input:
open sw_ch14.gdt
genr infl = 400*sdiff(log(PUNEW))

scalar p = 2
list X = LHUR infl
list Xlag = lags(p,X)

loop foreach i X
ols $i const Xlag
end loop

var p X

Output (selected portions):

Model 1: OLS, using observations 1960:3-1999:4 (T = 158)
Dependent variable: LHUR

coefficient std. error t-ratio p-value

--------------------------------------------------------
const 0.113673 0.0875210 1.299 0.1960
LHUR_1 1.54297 0.0680518 22.67 8.78e-51 ***
LHUR_2 -0.583104 0.0645879 -9.028 7.00e-16 ***
infl_1 0.0219040 0.00874581 2.505 0.0133 **
infl_2 -0.0148408 0.00920536 -1.612 0.1090

Mean dependent var 6.019198 S.D. dependent var 1.502549

Sum squared resid 8.654176 S.E. of regression 0.237830

...

VAR system, lag order 2

OLS estimates, observations 1960:3-1999:4 (T = 158)
Log-likelihood = -322.73663
Determinant of covariance matrix = 0.20382769
AIC = 4.2119
BIC = 4.4057
HQC = 4.2906
Portmanteau test: LB(39) = 226.984, df = 148 [0.0000]

Equation 1: LHUR

coefficient std. error t-ratio p-value

--------------------------------------------------------
const 0.113673 0.0875210 1.299 0.1960
LHUR_1 1.54297 0.0680518 22.67 8.78e-51 ***
LHUR_2 -0.583104 0.0645879 -9.028 7.00e-16 ***
infl_1 0.0219040 0.00874581 2.505 0.0133 **
infl_2 -0.0148408 0.00920536 -1.612 0.1090

Mean dependent var 6.019198 S.D. dependent var 1.502549

Sum squared resid 8.654176 S.E. of regression 0.237830
Chapter 24. Vector Autoregressions 195

Periodicity horizon
Quarterly 20 (5 years)
Monthly 24 (2 years)
Daily 3 weeks
All other cases 10

Table 24.1: VMA horizon as a function of the dataset periodicity

set horizon 30

Calling the horizon h, the $vma accessor returns an (h + 1) × n2 matrix, in which the (i + 1)-th row
is the vectorized form of Θi .

VAR order selection

In order to help the user choose the most appropriate VAR order, gretl provides a special syntax
construct to the var command:

var p Ylist [; Xlist] --lagselect

When the command is invoked with the --lagselect option, estimation is performed for all lags
up to p and a table is printed: it displays, for each order, a LR test for the order p versus p − 1,
plus an array of information criteria (see chapter 21). For each information criterion in the table, a
star indicates what appears to be the “best” choice. The same output can be obtained through the
graphical interface via the “Time Series, VAR lag selection” entry under the Model menu.
Warning: in finite samples the choice of p may affect the outcome of the procedure. This is not a
bug, but rather a nasty but unavoidable side effect of the way these comparisons should be made:
if your sample contains T observations, the lag selection procedure, if invoked with parameter p,
examines all VARs of order ranging form 1 to p, estimated on a sample of T − p observations. In
other words, the comparison procedure does not use all the data available when estimating VARs
of order less than p to make sure that all the models compared are estimated on the same data
range. Under these circumstances, choosing a different value of p may alter the results, although
this is unlikely to happen if your sample size is reasonably large.
An example of this unpleasant phenomenon is given in example script 24.2. As can be seen, ac-
cording to the Hannan-Quinn criterion, order 2 seems preferable to order 1 if the maximum tested
order is 4, but the situation is reversed if the maximum tested order is 6.

24.3 Structural VARs

As of today, gretl does not provide a native implementation for the class of models known as
“Structural VARs”; however, it provides an implementation of the Cholesky deconposition-based
approach, which is the most classic, and certainly most popular SVAR version.

IRF and FEVD

Assume that the disturbance in equation (24.1) can be thought of as a linear function of a vector
of structural shocks ut , which are assumed to have unit variance and to be incorrelated to one
another, so V (ut ) = I. If t = Kut , it follows that Σ = V (t ) = KK 0 .
The main object of interest in this setting the sequence of matrices

∂yt
Ck = = Θk K, (24.6)
∂ut−i
Chapter 24. Vector Autoregressions 196

Example 24.2: VAR lag selection via Information Criteria

Input:
open denmark
list Y = 1 2 3 4
var 4 Y --lagselect
var 6 Y --lagselect

Output (selected portions):

VAR system, maximum lag order 4

The asterisks below indicate the best (that is, minimized) values
of the respective information criteria, AIC = Akaike criterion,
BIC = Schwarz Bayesian criterion and HQC = Hannan-Quinn criterion.

lags loglik p(LR) AIC BIC HQC

1 609.15315 -23.104045 -22.346466* -22.814552

2 631.70153 0.00013 -23.360844* -21.997203 -22.839757*
3 642.38574 0.16478 -23.152382 -21.182677 -22.399699
4 653.22564 0.15383 -22.950025 -20.374257 -21.965748

VAR system, maximum lag order 6

The asterisks below indicate the best (that is, minimized) values
of the respective information criteria, AIC = Akaike criterion,
BIC = Schwarz Bayesian criterion and HQC = Hannan-Quinn criterion.

lags loglik p(LR) AIC BIC HQC

1 594.38410 -23.444249 -22.672078* -23.151288*

2 615.43480 0.00038 -23.650400* -22.260491 -23.123070
3 624.97613 0.26440 -23.386781 -21.379135 -22.625083
4 636.03766 0.13926 -23.185210 -20.559827 -22.189144
5 658.36014 0.00016 -23.443271 -20.200150 -22.212836
6 669.88472 0.11243 -23.260601 -19.399743 -21.795797
Chapter 24. Vector Autoregressions 197

known as the structural VMA representation. From the Ck matrices defined in equation (24.6) two
quantities of interest may be derived: the Impulse Response Function (IRF) and the Forecast Error
Variance Decomposition (FEVD).
The IRF of variable i to shock j is simply the sequence of the elements in row i and column j of
the Ck matrices. In formulae:
∂yi,t
Ii,j,k =
∂uj,t−k
As a rule, Impulse Response Functions are plotted as a function of k, and are interpreted as the
effect that a shock has on an observable variable through time. Of course, what we observe are the
estimated IRFs, so it is natural to endow them with confidence intervals: following common practice
among econometric software, gretl computes the confidence intervals by using the bootstrap2 ;
details are later in this section.
Another quantity of interest that may be computed from the structural VMA representation is the
Forecast Error Variance Decomposition (FEVD). The forecast error variance after h steps is given by

h
X
Ωh = Ck Ck0
k=0

hence the variance for variable i is

h
X h X
X n
ω2i = [Ωh ]i,i = diag(Ck Ck0 )i = (k ci.l )2
k=0 k=0 l=1

where k ci.l is, trivially, the i, l element of Ck . As a consequence, the share of uncertainty on variable
i that can be attributed to the j-th shock after h periods equals
Ph 2
k=0 (k ci.j )
V Di,j,h = Ph Pn .
2
k=0 l=1 (k ci.l )

This makes it possible to quantify which shocks are most important to determine a certain variable
in the short and/or in the long run.

Triangularization
The formula 24.6 takes K as known, while of course it has to be estimated. The estimation problem
has been the subject of an enormous body of literature we will not even attempt to summarize
here: see for example (Lütkepohl, 2005, chapter 9).
Suffice it to say that the most popular choice dates back to Sims (1980), and consists in assuming
that K is lower triangular, so its estimate is simply the Cholesky deconposition of the estimate of Σ.
The main consequence of this choice is that the ordering of variables within the vector yt becomes
meaningful: since K is also the matrix of Impulse Response Functions at lag 0, the triangularity
assumption means that the first variable in the ordering responds instantaneously only to shock
number 1, the second one only to shocks 1 and 2, and so forth. For this reason, each variable is
thought to “own” one shock: variable 1 owns shock number 1, etcetera.
This is the reason why in this sort of exercises the ordering of the variables is important and
the applied literature has developed the “most exogenous first” mantra. Where, in this setting,
“exogenous” really means “instantaneously insensitive to structural shocks”3 . To put it differently,
2 It is possible, in principle, to compute analytical confidence intervals via an asymptotic approximation, but this is

not a very popular choice: asymptotic formulae are known to often give a very poor approximation of the finite-sample
properties.
3 The word “exogenous” has caught on in this context, but it’s a rather unfortunate choice: for a start, each shock

impacts on every variable after one lag, so nothing is really exogenous here. A much better choice of words would
probably have been something like “sturdy”, but it’s too late now.
Chapter 24. Vector Autoregressions 198

if variable foo comes before variable bar in the Y list, it follows that the shock owned by foo
affects bar instantaneously, but the reverse does not happen.
Impulse Response Functions and the FEVD can be printed out via the command line interface by us-
ing the --impulse-response and --variance-decomp options, respectively. If you need to store
them into matrices, you can compute the structural VMA and proceed from there. For example, the
following code snippet shows you how to compute a matrix containing the IRFs:

open denmark
list Y = 1 2 3 4
scalar n = nelem(Y)
var 2 Y --quiet --impulse

matrix K = cholesky($sigma)
matrix V = $vma
matrix IRF = V * (K ** I(n))
print IRF

in which the equality

vec(Ck ) = vec(Θk K) = (K 0 ⊗ I)vec(Θk )
was used.
FIXME: show all the nice stuff we have under the GUI.

IRF bootstrap
FIXME: todo
 Chapter 25

Cointegration and Vector Error Correction Models

25.1 Introduction
The twin concepts of cointegration and error correction have drawn a good deal of attention in
macroeconometrics over recent years. The attraction of the Vector Error Correction Model (VECM)
is that it allows the researcher to embed a representation of economic equilibrium relationships
within a relatively rich time-series specification. This approach overcomes the old dichotomy be-
tween (a) structural models that faithfully represented macroeconomic theory but failed to fit the
data, and (b) time-series models that were accurately tailored to the data but difficult if not impos-
sible to interpret in economic terms.
The basic idea of cointegration relates closely to the concept of unit roots (see section 23.3). Sup-
pose we have a set of macroeconomic variables of interest, and we find we cannot reject the hypoth-
esis that some of these variables, considered individually, are non-stationary. Specifically, suppose
we judge that a subset of the variables are individually integrated of order 1, or I(1). That is, while
they are non-stationary in their levels, their first differences are stationary. Given the statistical
problems associated with the analysis of non-stationary data (for example, the threat of spurious
regression), the traditional approach in this case was to take first differences of all the variables
before proceeding with the analysis.
But this can result in the loss of important information. It may be that while the variables in
question are I(1) when taken individually, there exists a linear combination of the variables that
is stationary without differencing, or I(0). (There could be more than one such linear combina-
tion.) That is, while the ensemble of variables may be “free to wander” over time, nonetheless the
variables are “tied together” in certain ways. And it may be possible to interpret these ties, or
cointegrating vectors, as representing equilibrium conditions.
For example, suppose we find some or all of the following variables are I(1): money stock, M, the
price level, P , the nominal interest rate, R, and output, Y . According to standard theories of the
demand for money, we would nonetheless expect there to be an equilibrium relationship between
real balances, interest rate and output; for example

m − p = γ0 + γ1 y + γ2 r γ1 > 0, γ2 < 0

where lower-case variable names denote logs. In equilibrium, then,

m − p − γ1 y − γ2 r = γ0

Realistically, we should not expect this condition to be satisfied each period. We need to allow for
the possibility of short-run disequilibrium. But if the system moves back towards equilibrium fol-
lowing a disturbance, it follows that the vector x = (m, p, y, r )0 is bound by a cointegrating vector
β0 = (β1 , β2 , β3 , β4 ), such that β0 x is stationary (with a mean of γ0 ). Furthermore, if equilibrium is
correctly characterized by the simple model above, we have β2 = −β1 , β3 < 0 and β4 > 0. These
things are testable within the context of cointegration analysis.
There are typically three steps in this sort of analysis:

1. Test to determine the number of cointegrating vectors, the cointegrating rank of the system.

2. Estimate a VECM with the appropriate rank, but subject to no further restrictions.

199
Chapter 25. Cointegration and Vector Error Correction Models 200

3. Probe the interpretation of the cointegrating vectors as equilibrium conditions by means of

restrictions on the elements of these vectors.

The following sections expand on each of these points, giving further econometric details and
explaining how to implement the analysis using gretl.

25.2 Vector Error Correction Models as representation of a cointegrated system

Consider a VAR of order p with a deterministic part given by µt (typically, a polynomial in time).
One can write the n-variate process yt as

yt = µt + A1 yt−1 + A2 yt−2 + · · · + Ap yt−p + t (25.1)

But since yt−i ≡ yt−1 − (∆yt−1 + ∆yt−2 + · · · + ∆yt−i+1 ), we can re-write the above as

p−1
X
∆yt = µt + Πyt−1 + Γi ∆yt−i + t , (25.2)
i=1
Pp Pp
where Π = i=1 Ai − I and Γi = − j=i+1 Aj . This is the VECM representation of (25.1).
The interpretation of (25.2) depends crucially on r , the rank of the matrix Π.

• If r = 0, the processes are all I(1) and not cointegrated.

• If r = n, then Π is invertible and the processes are all I(0).

• Cointegration occurs in between, when 0 < r < n and Π can be written as αβ0 . In this case,
yt is I(1), but the combination zt = β0 yt is I(0). If, for example, r = 1 and the first element
of β was −1, then one could write zt = −y1,t + β2 y2,t + · · · + βn yn,t , which is equivalent to
saying that
y1t = β2 y2,t + · · · + βn yn,t − zt
is a long-run equilibrium relationship: the deviations zt may not be 0 but they are stationary.
In this case, (25.2) can be written as
p−1
X
∆yt = µt + αβ0 yt−1 + Γi ∆yt−i + t . (25.3)
i=1

If β were known, then zt would be observable and all the remaining parameters could be
estimated via OLS. In practice, the procedure estimates β first and then the rest.

The rank of Π is investigated by computing the eigenvalues of a closely related matrix whose rank
is the same as Π: however, this matrix is by construction symmetric and positive semidefinite. As a
consequence, all its eigenvalues are real and non-negative, and tests on the rank of Π can therefore
be carried out by testing how many eigenvalues are 0.
If all the eigenvalues are significantly different from 0, then all the processes are stationary. If,
on the contrary, there is at least one zero eigenvalue, then the yt process is integrated, although
some linear combination β0 yt might be stationary. At the other extreme, if no eigenvalues are
significantly different from 0, then not only is the process yt non-stationary, but the same holds
for any linear combination β0 yt ; in other words, no cointegration occurs.
Estimation typically proceeds in two stages: first, a sequence of tests is run to determine r , the
cointegration rank. Then, for a given rank the parameters in equation (25.3) are estimated. The two
commands that gretl offers for estimating these systems are coint2 and vecm, respectively.
The syntax for coint2 is
Chapter 25. Cointegration and Vector Error Correction Models 201

coint2 p ylist [ ; xlist [ ; zlist ] ]

where p is the number of lags in (25.1); ylist is a list containing the yt variables; xlist is an
optional list of exogenous variables; and zlist is another optional list of exogenous variables
whose effects are assumed to be confined to the cointegrating relationships.
The syntax for vecm is

vecm p r ylist [ ; xlist [ ; zlist ] ]

where p is the number of lags in (25.1); r is the cointegration rank; and the lists ylist, xlist and
zlist have the same interpretation as in coint2.
Both commands can be given specific options to handle the treatment of the deterministic compo-
nent µt . These are discussed in the following section.

25.3 Interpretation of the deterministic components

Statistical inference in the context of a cointegrated system depends on the hypotheses one is
willing to make on the deterministic terms, which leads to the famous “five cases.”
In equation (25.2), the term µt is usually understood to take the form

µt = µ0 + µ1 · t.

In order to have the model mimic as closely as possible the features of the observed data, there is a
preliminary question to settle. Do the data appear to follow a deterministic trend? If so, is it linear
or quadratic?
Once this is established, one should impose restrictions on µ0 and µ1 that are consistent with this
judgement. For example, suppose that the data do not exhibit a discernible trend. This means that
∆yt is on average zero, so it is reasonable to assume that its expected value is also zero. Write
equation (25.2) as
Γ (L)∆yt = µ0 + µ1 · t + αzt−1 + t , (25.4)
where zt = β0 yt is assumed to be stationary and therefore to possess finite moments. Taking
unconditional expectations, we get

0 = µ0 + µ1 · t + αmz .

Since the left-hand side does not depend on t, the restriction µ1 = 0 is a safe bet. As for µ0 , there are
just two ways to make the above expression true: either µ0 = 0 with mz = 0, or µ0 equals −αmz .
The latter possibility is less restrictive in that the vector µ0 may be non-zero, but is constrained to
be a linear combination of the columns of α. In that case, µ0 can be written as α · c, and one may
write (25.4) as " #
 0  yt−1
Γ (L)∆yt = α β c + t .
1
The long-run relationship therefore contains an intercept. This type of restriction is usually written
0
α⊥ µ0 = 0,

where α⊥ is the left null space of the matrix α.

An intuitive understanding of the issue can be gained by means of a simple example. Consider a
series xt which behaves as follows
xt = m + xt−1 + εt
where m is a real number and εt is a white noise process: xt is then a random walk with drift m.
In the special case m = 0, the drift disappears and xt is a pure random walk.
Chapter 25. Cointegration and Vector Error Correction Models 202

Consider now another process yt , defined by

yt = k + xt + ut

where, again, k is a real number and ut is a white noise process. Since ut is stationary by definition,
xt and yt cointegrate: that is, their difference

zt = yt − xt = k + ut

is a stationary process. For k = 0, zt is simple zero-mean white noise, whereas for k 6= 0 the process
zt is white noise with a non-zero mean.
After some simple substitutions, the two equations above can be represented jointly as a VAR(1)
system " # " # " #" # " #
yt k+m 0 1 yt−1 ut + εt
= + +
xt m 0 1 xt−1 εt
or in VECM form
" # " # " #" # " #
∆yt k+m −1 1 yt−1 ut + εt
= + + =
∆xt m 0
0 xt−1 εt
" # " # " # " #
k+m −1 h i yt−1 ut + εt
= + 1 −1 + =
m 0 xt−1 εt
" #
0 yt−1
= µ0 + αβ + ηt = µ0 + αzt−1 + ηt ,
xt−1

where β is the cointegration vector and α is the “loadings” or “adjustments” vector.

We are now ready to consider three possible cases:

1. m 6= 0: In this case xt is trended, as we just saw; it follows that yt also follows a linear trend
because on average it keeps at a fixed distance k from xt . The vector µ0 is unrestricted.

2. m = 0 and k 6= 0: In this case, xt is not trended and as a consequence neither is yt . However,

the mean distance between yt and xt is non-zero. The vector µ0 is given by
" #
k
µ0 =
0

which is not null and therefore the VECM shown above does have a constant term. The
constant, however, is subject to the restriction that its second element must be 0. More
generally, µ0 is a multiple of the vector α. Note that the VECM could also be written as
 
" # " # yt−1 " #
∆yt −1 h i   ut + εt
= 1 −1 −k  xt−1  +
 
∆xt 0 εt
1

which incorporates the intercept into the cointegration vector. This is known as the “restricted
constant” case.

3. m = 0 and k = 0: This case is the most restrictive: clearly, neither xt nor yt are trended, and
the mean distance between them is zero. The vector µ0 is also 0, which explains why this case
is referred to as “no constant.”

In most cases, the choice between these three possibilities is based on a mix of empirical obser-
vation and economic reasoning. If the variables under consideration seem to follow a linear trend
Chapter 25. Cointegration and Vector Error Correction Models 203

then we should not place any restriction on the intercept. Otherwise, the question arises of whether
it makes sense to specify a cointegration relationship which includes a non-zero intercept. One ex-
ample where this is appropriate is the relationship between two interest rates: generally these are
not trended, but the VAR might still have an intercept because the difference between the two (the
“interest rate spread”) might be stationary around a non-zero mean (for example, because of a risk
or liquidity premium).
The previous example can be generalized in three directions:

1. If a VAR of order greater than 1 is considered, the algebra gets more convoluted but the
conclusions are identical.

2. If the VAR includes more than two endogenous variables the cointegration rank r can be
greater than 1. In this case, α is a matrix with r columns, and the case with restricted constant
entails the restriction that µ0 should be some linear combination of the columns of α.

3. If a linear trend is included in the model, the deterministic part of the VAR becomes µ0 + µ1 t.
The reasoning is practically the same as above except that the focus now centers on µ1 rather
than µ0 . The counterpart to the “restricted constant” case discussed above is a “restricted
trend” case, such that the cointegration relationships include a trend but the first differences
of the variables in question do not. In the case of an unrestricted trend, the trend appears
in both the cointegration relationships and the first differences, which corresponds to the
presence of a quadratic trend in the variables themselves (in levels).

In order to accommodate the five cases, gretl provides the following options to the coint2 and
vecm commands:

µt option flag description

0 --nc no constant
0
µ0 , α⊥ µ0 = 0 --rc restricted constant
µ0 --uc unrestricted constant
0
µ0 + µ1 t, α⊥ µ1 = 0 --crt constant + restricted trend
µ0 + µ1 t --ct constant + unrestricted trend

Note that for this command the above options are mutually exclusive. In addition, you have the
option of using the --seasonal options, for augmenting µt with centered seasonal dummies. In
each case, p-values are computed via the approximations devised by Doornik (1998).

25.4 The Johansen cointegration tests

The two Johansen tests for cointegration are used to establish the rank of β; in other words, how
many cointegration vectors the system has. These are the “λ-max” test, for hypotheses on indi-
vidual eigenvalues, and the “trace” test, for joint hypotheses. Suppose that the eigenvalues λi are
sorted from largest to smallest. The null hypothesis for the λ-max test on the i-th eigenvalue is
that λi = 0. The corresponding trace test, instead, considers the hypothesis λj = 0 for all j ≥ i.
The gretl command coint2 performs these two tests. The corresponding menu entry in the GUI is
“Model, Time Series, Cointegration Test, Johansen”.
As in the ADF test, the asymptotic distribution of the tests varies with the deterministic component
µt one includes in the VAR (see section 25.3 above). The following code uses the denmark data file,
supplied with gretl, to replicate Johansen’s example found in his 1995 book.

open denmark
coint2 2 LRM LRY IBO IDE --rc --seasonal
Chapter 25. Cointegration and Vector Error Correction Models 204

In this case, the vector yt in equation (25.2) comprises the four variables LRM, LRY, IBO, IDE. The
number of lags equals p in (25.2) (that is, the number of lags of the model written in VAR form).
Part of the output is reported below:

Johansen test:
Number of equations = 4
Lag order = 2
Estimation period: 1974:3 - 1987:3 (T = 53)

Case 2: Restricted constant

Rank Eigenvalue Trace test p-value Lmax test p-value
0 0.43317 49.144 [0.1284] 30.087 [0.0286]
1 0.17758 19.057 [0.7833] 10.362 [0.8017]
2 0.11279 8.6950 [0.7645] 6.3427 [0.7483]
3 0.043411 2.3522 [0.7088] 2.3522 [0.7076]

Both the trace and λ-max tests accept the null hypothesis that the smallest eigenvalue is 0 (see the
last row of the table), so we may conclude that the series are in fact non-stationary. However, some
linear combination may be I(0), since the λ-max test rejects the hypothesis that the rank of Π is 0
(though the trace test gives less clear-cut evidence for this, with a p-value of 0.1284).

25.5 Identification of the cointegration vectors

The core problem in the estimation of equation (25.2) is to find an estimate of Π that has by con-
struction rank r , so it can be written as Π = αβ0 , where β is the matrix containing the cointegration
vectors and α contains the “adjustment” or “loading” coefficients whereby the endogenous vari-
ables respond to deviation from equilibrium in the previous period.
Without further specification, the problem has multiple solutions (in fact, infinitely many). The
parameters α and β are under-identified: if all columns of β are cointegration vectors, then any
arbitrary linear combinations of those columns is a cointegration vector too. To put it differently,
if Π = α0 β00 for specific matrices α0 and β0 , then Π also equals (α0 Q)(Q−1 β00 ) for any conformable
non-singular matrix Q. In order to find a unique solution, it is therefore necessary to impose
some restrictions on α and/or β. It can be shown that the minimum number of restrictions that
is necessary to guarantee identification is r 2 . Normalizing one coefficient per column to 1 (or −1,
according to taste) is a trivial first step, which also helps in that the remaining coefficients can be
interpreted as the parameters in the equilibrium relations, but this only suffices when r = 1.
The method that gretl uses by default is known as the “Phillips normalization”, or “triangular
representation”.1 The starting point is writing β in partitioned form as in
" #
β1
β= ,
β2

where β1 is an r × r matrix and β2 is (n − r ) × r . Assuming that β1 has full rank, β can be

post-multiplied by β−1
1 , giving " # " #
I I
β̂ = = ,
β2 β−1
1 −B

The coefficients that gretl produces are β̂, with B known as the matrix of unrestricted coefficients.
In terms of the underlying equilibrium relationship, the Phillips normalization expresses the system
1 For comparison with other studies, you may wish to normalize β differently. Using the set command you can do

set vecm_norm diag to select a normalization that simply scales the columns of the original β such that βij = 1
for i = j and i ≤ r , as used in the empirical section of Boswijk and Doornik (2004). Another alternative is
set vecm_norm first, which scales β such that the elements on the first row equal 1. To suppress normalization
altogether, use set vecm_norm none. (To return to the default: set vecm_norm phillips.)
Chapter 25. Cointegration and Vector Error Correction Models 205

of r equilibrium relations as

y1,t = b1,r +1 yr +1,t + . . . + b1,n yn,t

y2,t = b2,r +1 yr +1,t + . . . + b2,n yn,t
..
.
yr ,t = br ,r +1 yr +1,t + . . . + br ,n yr ,t

where the first r variables are expressed as functions of the remaining n − r .

Although the triangular representation ensures that the statistical problem of estimating β is
solved, the resulting equilibrium relationships may be difficult to interpret. In this case, the user
may want to achieve identification by specifying manually the system of r 2 constraints that gretl
will use to produce an estimate of β.
As an example, consider the money demand system presented in section 9.6 of Verbeek (2004). The
variables used are m (the log of real money stock M1), infl (inflation), cpr (the commercial paper
rate), y (log of real GDP) and tbr (the Treasury bill rate).2
Estimation of β can be performed via the commands

open money.gdt
smpl 1954:1 1994:4
vecm 6 2 m infl cpr y tbr --rc

and the relevant portion of the output reads

Maximum likelihood estimates, observations 1954:1-1994:4 (T = 164)

Cointegration rank = 2
Case 2: Restricted constant

beta (cointegrating vectors, standard errors in parentheses)

m 1.0000 0.0000
(0.0000) (0.0000)
infl 0.0000 1.0000
(0.0000) (0.0000)
cpr 0.56108 -24.367
(0.10638) (4.2113)
y -0.40446 -0.91166
(0.10277) (4.0683)
tbr -0.54293 24.786
(0.10962) (4.3394)
const -3.7483 16.751
(0.78082) (30.909)

Interpretation of the coefficients of the cointegration matrix β would be easier if a meaning could
be attached to each of its columns. This is possible by hypothesizing the existence of two long-run
relationships: a money demand equation

m = c1 + β1 infl + β2 y + β3 tbr

and a risk premium equation

cpr = c2 + β4 infl + β5 y + β6 tbr

2 This data set is available in the verbeek data package; see http://gretl.sourceforge.net/gretl_data.html.
Chapter 25. Cointegration and Vector Error Correction Models 206

which imply that the cointegration matrix can be normalized as

 
−1 0
 
 β1 β4 
 
 0 −1 
 
β=  
 β2 β5 

 
 β3 β6 
 
c1 c2

This renormalization can be accomplished by means of the restrict command, to be given after
the vecm command or, in the graphical interface, by selecting the “Test, Linear Restrictions” menu
entry. The syntax for entering the restrictions should be fairly obvious:3

restrict
b[1,1] = -1
b[1,3] = 0
b[2,1] = 0
b[2,3] = -1
end restrict

which produces

Cointegrating vectors (standard errors in parentheses)

m -1.0000 0.0000
(0.0000) (0.0000)
infl -0.023026 0.041039
(0.0054666) (0.027790)
cpr 0.0000 -1.0000
(0.0000) (0.0000)
y 0.42545 -0.037414
(0.033718) (0.17140)
tbr -0.027790 1.0172
(0.0045445) (0.023102)
const 3.3625 0.68744
(0.25318) (1.2870)

25.6 Over-identifying restrictions

One purpose of imposing restrictions on a VECM system is simply to achieve identification. If these
restrictions are simply normalizations, they are not testable and should have no effect on the max-
imized likelihood. In addition, however, one may wish to formulate constraints on β and/or α that
derive from the economic theory underlying the equilibrium relationships; substantive restrictions
of this sort are then testable via a likelihood-ratio statistic.
Gretl is capable of testing general linear restrictions of the form

Rb vec(β) = q (25.5)

and/or
Ra vec(α) = 0 (25.6)
Note that the β restriction may be non-homogeneous (q ≠ 0) but the α restriction must be homo-
geneous. Nonlinear restrictions are not supported, and neither are restrictions that cross between
3 Note that in this context we are bending the usual matrix indexation convention, using the leading index to refer to

the column of β (the particular cointegrating vector). This is standard practice in the literature, and defensible insofar as
it is the columns of β (the cointegrating relations or equilibrium errors) that are of primary interest.
Chapter 25. Cointegration and Vector Error Correction Models 207

β and α. In the case where r > 1 such restrictions may be in common across all the columns of β
(or α) or may be specific to certain columns of these matrices. This is the case discussed in Boswijk
(1995) and Boswijk and Doornik (2004), section 4.4.
The restrictions (25.5) and (25.6) may be written in explicit form as

vec(β) = Hφ + h0 (25.7)

and
vec(α0 ) = Gψ (25.8)
respectively, where φ and ψ are the free parameter vectors associated with β and α respectively.
We may refer to the free parameters collectively as θ (the column vector formed by concatenating
φ and ψ). Gretl uses this representation internally when testing the restrictions.
If the list of restrictions that is passed to the restrict command contains more constraints than
necessary to achieve identification, then an LR test is performed; moreover, the restrict com-
mand can be given the --full switch, in which case full estimates for the restricted system are
printed (including the Γi terms), and the system thus restricted becomes the “current model” for
the purposes of further tests. Thus you are able to carry out cumulative tests, as in Chapter 7 of
Johansen (1995).

Syntax
The full syntax for specifying the restriction is an extension of that exemplified in the previous
section. Inside a restrict. . . end restrict block, valid statements are of the form

parameter linear combination = scalar

where a parameter linear combination involves a weighted sum of individual elements of β or α

(but not both in the same combination); the scalar on the right-hand side must be 0 for combina-
tions involving α, but can be any real number for combinations involving β. Below, we give a few
examples of valid restrictions:

b[1,1] = 1.618
b[1,4] + 2*b[2,5] = 0
a[1,3] = 0
a[1,1] - a[1,2] = 0

Special syntax is used when a certain constraint should be applied to all columns of β: in this case,
one index is given for each b term, and the square brackets are dropped. Hence, the following
syntax

restrict
b1 + b2 = 0
end restrict

corresponds to
 
β11 β21
 −β11 −β21 
 
β=
 β

 13 β23 

β14 β24
The same convention is used for α: when only one index is given for an a term the restriction is
presumed to apply to all r columns of α, or in other words the variable associated with the given
row of α is weakly exogenous. For instance, the formulation
Chapter 25. Cointegration and Vector Error Correction Models 208

restrict
a3 = 0
a4 = 0
end restrict

specifies that variables 3 and 4 do not respond to the deviation from equilibrium in the previous
period.4
A variant on the single-index syntax for common restrictions on α and β is available: you can
replace the index number with the name of the corresponding variable, in square brackets. For
example, instead of a3 = 0 one could write a[cpr] = 0, if the third variable in the system is
named cpr.
Finally, a short-cut is available for setting up complex restrictions (but currently only in relation
to β): you can specify Rb and q, as in Rb vec(β) = q, by giving the names of previously defined
matrices. For example,

matrix I4 = I(4)
matrix vR = I4**(I4~zeros(4,1))
matrix vq = mshape(I4,16,1)
restrict
R = vR
q = vq
end restrict

which manually imposes Phillips normalization on the β estimates for a system with cointegrating
rank 4.

An example
Brand and Cassola (2004) propose a money demand system for the Euro area, in which they postu-
late three long-run equilibrium relationships:

money demand m = βl l + βy y
Fisher equation π = φl
Expectation theory of l=s
interest rates

where m is real money demand, l and s are long- and short-term interest rates, y is output and
π is inflation.5 (The names for these variables in the gretl data file are m_p, rl, rs, y and infl,
respectively.)
The cointegration rank assumed by the authors is 3 and there are 5 variables, giving 15 elements
in the β matrix. 3 × 3 = 9 restrictions are required for identification, and a just-identified system
would have 15 − 9 = 6 free parameters. However, the postulated long-run relationships feature
only three free parameters, so the over-identification rank is 3.
Example 25.1 replicates Table 4 on page 824 of the Brand and Cassola article.6 Note that we use
the $lnl accessor after the vecm command to store the unrestricted log-likelihood and the $rlnl
accessor after restrict for its restricted counterpart.
4 Note that when two indices are given in a restriction on α the indexation is consistent with that for β restrictions: the

leading index denotes the cointegrating vector and the trailing index the equation number.
5 A traditional formulation of the Fisher equation would reverse the roles of the variables in the second equation,

but this detail is immaterial in the present context; moreover, the expectation theory of interest rates implies that the
third equilibrium relationship should include a constant for the liquidity premium. However, since in this example the
system is estimated with the constant term unrestricted, the liquidity premium gets merged in the system intercept and
disappears from zt .
6 Modulo what appear to be a few typos in the article.
Chapter 25. Cointegration and Vector Error Correction Models 209

Example 25.1: Estimation of a money demand system with constraints on β

Input:

open brand_cassola.gdt

# perform a few transformations

m_p = m_p*100
y = y*100
infl = infl/4
rs = rs/4
rl = rl/4

# replicate table 4, page 824

vecm 2 3 m_p infl rl rs y -q
genr ll0 = $lnl

restrict --full
b[1,1] = 1
b[1,2] = 0
b[1,4] = 0
b[2,1] = 0
b[2,2] = 1
b[2,4] = 0
b[2,5] = 0
b[3,1] = 0
b[3,2] = 0
b[3,3] = 1
b[3,4] = -1
b[3,5] = 0
end restrict
genr ll1 = $rlnl

Partial output:
Unrestricted loglikelihood (lu) = 116.60268
Restricted loglikelihood (lr) = 115.86451
2 * (lu - lr) = 1.47635
P(Chi-Square(3) > 1.47635) = 0.68774

beta (cointegrating vectors, standard errors in parentheses)

m_p 1.0000 0.0000 0.0000

(0.0000) (0.0000) (0.0000)
infl 0.0000 1.0000 0.0000
(0.0000) (0.0000) (0.0000)
rl 1.6108 -0.67100 1.0000
(0.62752) (0.049482) (0.0000)
rs 0.0000 0.0000 -1.0000
(0.0000) (0.0000) (0.0000)
y -1.3304 0.0000 0.0000
(0.030533) (0.0000) (0.0000)
Chapter 25. Cointegration and Vector Error Correction Models 210

The example continues in script 25.2, where we perform further testing to check whether (a) the
income elasticity in the money demand equation is 1 (βy = 1) and (b) the Fisher relation is homo-
geneous (φ = 1). Since the --full switch was given to the initial restrict command, additional
restrictions can be applied without having to repeat the previous ones. (The second script contains
a few printf commands, which are not strictly necessary, to format the output nicely.) It turns out
that both of the additional hypotheses are rejected by the data, with p-values of 0.002 and 0.004.

Example 25.2: Further testing of money demand system

Input:
restrict
b[1,5] = -1
end restrict
genr ll_uie = $rlnl

restrict
b[2,3] = -1
end restrict
genr ll_hfh = $rlnl

# replicate table 5, page 824

printf "Testing zero restrictions in cointegration space:\n"
printf " LR-test, rank = 3: chi^2(3) = %6.4f [%6.4f]\n", 2*(ll0-ll1), \
pvalue(X, 3, 2*(ll0-ll1))

printf "Unit income elasticity: LR-test, rank = 3:\n"

printf " chi^2(4) = %g [%6.4f]\n", 2*(ll0-ll_uie), \
pvalue(X, 4, 2*(ll0-ll_uie))

printf "Homogeneity in the Fisher hypothesis:\n"

printf " LR-test, rank = 3: chi^2(4) = %6.3f [%6.4f]\n", 2*(ll0-ll_hfh), \
pvalue(X, 4, 2*(ll0-ll_hfh))

Output:

Testing zero restrictions in cointegration space:

LR-test, rank = 3: chi^2(3) = 1.4763 [0.6877]
Unit income elasticity: LR-test, rank = 3:
chi^2(4) = 17.2071 [0.0018]
Homogeneity in the Fisher hypothesis:
LR-test, rank = 3: chi^2(4) = 15.547 [0.0037]

Another type of test that is commonly performed is the “weak exogeneity” test. In this context, a
variable is said to be weakly exogenous if all coefficients on the corresponding row in the α matrix
are zero. If this is the case, that variable does not adjust to deviations from any of the long-run
equilibria and can be considered an autonomous driving force of the whole system.
The code in Example 25.3 performs this test for each variable in turn, thus replicating the first
column of Table 6 on page 825 of Brand and Cassola (2004). The results show that weak exogeneity
might perhaps be accepted for the long-term interest rate and real GDP (p-values 0.07 and 0.08
respectively).

Identification and testability

One point regarding VECM restrictions that can be confusing at first is that identification (does
the restriction identify the system?) and testability (is the restriction testable?) are quite separate
matters. Restrictions can be identifying but not testable; less obviously, they can be testable but
not identifying.
Chapter 25. Cointegration and Vector Error Correction Models 211

Example 25.3: Testing for weak exogeneity

Input:
restrict
a1 = 0
end restrict
ts_m = 2*(ll0 - $rlnl)

restrict
a2 = 0
end restrict
ts_p = 2*(ll0 - $rlnl)

restrict
a3 = 0
end restrict
ts_l = 2*(ll0 - $rlnl)

restrict
a4 = 0
end restrict
ts_s = 2*(ll0 - $rlnl)

restrict
a5 = 0
end restrict
ts_y = 2*(ll0 - $rlnl)

loop foreach i m p l s y --quiet

printf "\Delta $i\t%6.3f [%6.4f]\n", ts_$i, pvalue(X, 6, ts_$i)
endloop

Output (variable, LR test, p-value):

\Delta m 18.111 [0.0060]

\Delta p 21.067 [0.0018]
\Delta l 11.819 [0.0661]
\Delta s 16.000 [0.0138]
\Delta y 11.335 [0.0786]
Chapter 25. Cointegration and Vector Error Correction Models 212

This can be seen quite easily in relation to a rank-1 system. The restriction β1 = 1 is identifying
(it pins down the scale of β) but, being a pure scaling, it is not testable. On the other hand, the
restriction β1 +β2 = 0 is testable — the system with this requirement imposed will almost certainly
have a lower maximized likelihood — but it is not identifying; it still leaves open the scale of β.
We said above that the number of restrictions must equal at least r 2 , where r is the cointegrating
rank, for identification. This is a necessary and not a sufficient condition. In fact, when r > 1 it can
be quite tricky to assess whether a given set of restrictions is identifying. Gretl uses the method
suggested by Doornik (1995), where identification is assessed via the rank of the information ma-
trix.
It can be shown that for restrictions of the sort (25.7) and (25.8) the information matrix has the
same rank as the Jacobian matrix
h i
J(θ) = (Ip ⊗ β)G : (α ⊗ Ip1 )H

A sufficient condition for identification is that the rank of J(θ) equals the number of free para-
meters. The rank of this matrix is evaluated by examination of its singular values at a randomly
selected point in the parameter space. For practical purposes we treat this condition as if it were
both necessary and sufficient; that is, we disregard the special cases where identification could be
achieved without this condition being met.7

25.7 Numerical solution methods

In general, the ML estimator for the restricted VECM problem has no closed form solution, hence
the maximum must be found via numerical methods.8 In some cases convergence may be difficult,
and gretl provides several choices to solve the problem.

Switching and LBFGS

Two maximization methods are available in gretl. The default is the switching algorithm set out
in Boswijk and Doornik (2004). The alternative is a limited-memory variant of the BFGS algorithm
(LBFGS), using analytical derivatives. This is invoked using the --lbfgs flag with the restrict
command.
The switching algorithm works by explicitly maximizing the likelihood at each iteration, with re-
spect to φ̂, ψ̂ and Ω̂ (the covariance matrix of the residuals) in turn. This method shares a feature
with the basic Johansen eigenvalues procedure, namely, it can handle a set of restrictions that does
not fully identify the parameters.
LBFGS, on the other hand, requires that the model be fully identified. When using LBFGS, therefore,
you may have to supplement the restrictions of interest with normalizations that serve to identify
the parameters. For example, one might use all or part of the Phillips normalization (see section
25.5).
Neither the switching algorithm nor LBFGS is guaranteed to find the global ML solution.9 The
optimizer may end up at a local maximum (or, in the case of the switching algorithm, at a saddle
point).
The solution (or lack thereof) may be sensitive to the initial value selected for θ. By default, gretl
selects a starting point using a deterministic method based on Boswijk (1995), but two further
7 See Boswijk and Doornik (2004), pp. 447–8 for discussion of this point.
8 The exception is restrictions that are homogeneous, common to all β or all α (in case r > 1), and involve either β
only or α only. Such restrictions are handled via the modified eigenvalues method set out by Johansen (1995). We solve
directly for the ML estimator, without any need for iterative methods.
9 In developing gretl’s VECM-testing facilities we have considered a fair number of “tricky cases” from various sources.

We’d like to thank Luca Fanelli of the University of Bologna and Sven Schreiber of Goethe University Frankfurt for their
help in devising torture-tests for gretl’s VECM code.
Chapter 25. Cointegration and Vector Error Correction Models 213

options are available: the initialization may be adjusted using simulated annealing, or the user may
supply an explicit initial value for θ.
The default initialization method is:

1. Calculate the unrestricted ML β̂ using the Johansen procedure.

2. If the restriction on β is non-homogeneous, use the method proposed by Boswijk:

φ0 = −[(Ir ⊗ β̂⊥ )0 H]+ (Ir ⊗ β̂⊥ )0 h0 (25.9)

where β̂0⊥ β̂ = 0 and A+ denotes the Moore–Penrose inverse of A. Otherwise

φ0 = (H 0 H)−1 H 0 vec(β̂) (25.10)

3. vec(β0 ) = Hφ0 + h0 .

4. Calculate the unrestricted ML α̂ conditional on β0 , as per Johansen:

α̂ = S01 β0 (β00 S11 β0 )−1 (25.11)

5. If α is restricted by vec(α0 ) = Gψ, then ψ0 = (G0 G)−1 G0 vec(α̂0 ) and vec(α00 ) = Gψ0 .

Alternative initialization methods

As mentioned above, gretl offers the option of adjusting the initialization using simulated anneal-
ing. This is invoked by adding the --jitter option to the restrict command.
The basic idea is this: we start at a certain point in the parameter space, and for each of n iterations
(currently n = 4096) we randomly select a new point within a certain radius of the previous one,
and determine the likelihood at the new point. If the likelihood is higher, we jump to the new
point; otherwise, we jump with probability P (and remain at the previous point with probability
1 − P ). As the iterations proceed, the system gradually “cools” — that is, the radius of the random
perturbation is reduced, as is the probability of making a jump when the likelihood fails to increase.
In the course of this procedure many points in the parameter space are evaluated, starting with the
point arrived at by the deterministic method, which we’ll call θ0 . One of these points will be “best”
in the sense of yielding the highest likelihood: call it θ ∗ . This point may or may not have a greater
likelihood than θ0 . And the procedure has an end point, θn , which may or may not be “best”.
The rule followed by gretl in selecting an initial value for θ based on simulated annealing is this: use
θ ∗ if θ ∗ > θ0 , otherwise use θn . That is, if we get an improvement in the likelihood via annealing,
we make full use of this; on the other hand, if we fail to get an improvement we nonetheless allow
the annealing to randomize the starting point. Experiments indicated that the latter effect can be
helpful.
Besides annealing, a further alternative is manual initialization. This is done by passing a prede-
fined vector to the set command with parameter initvals, as in

set initvals myvec

The details depend on whether the switching algorithm or LBFGS is used. For the switching algo-
rithm, there are two options for specifying the initial values. The more user-friendly one (for most
people, we suppose) is to specify a matrix that contains vec(β) followed by vec(α). For example:

open denmark.gdt
vecm 2 1 LRM LRY IBO IDE --rc --seasonals

matrix BA = {1, -1, 6, -6, -6, -0.2, 0.1, 0.02, 0.03}

Chapter 25. Cointegration and Vector Error Correction Models 214

set initvals BA
restrict
b[1] = 1
b[1] + b[2] = 0
b[3] + b[4] = 0
end restrict

In this example — from Johansen (1995) — the cointegration rank is 1 and there are 4 variables.
However, the model includes a restricted constant (the --rc flag) so that β has 5 elements. The α
matrix has 4 elements, one per equation. So the matrix BA may be read as

(β1 , β2 , β3 , β4 , β5 , α1 , α2 , α3 , α4 )

The other option, which is compulsory when using LBFGS, is to specify the initial values in terms
of the free parameters, φ and ψ. Getting this right is somewhat less obvious. As mentioned above,
the implicit-form restriction Rvec(β) = q has explicit form vec(β) = Hφ + h0 , where H = R⊥ , the
right nullspace of R. The vector φ is shorter, by the number of restrictions, than vec(β). The
savvy user will then see what needs to be done. The other point to take into account is that if α is
unrestricted, the effective length of ψ is 0, since it is then optimal to compute α using Johansen’s
formula, conditional on β (equation 25.11 above). The example above could be rewritten as:

open denmark.gdt
vecm 2 1 LRM LRY IBO IDE --rc --seasonals

matrix phi = {-8, -6}

set initvals phi
restrict --lbfgs
b[1] = 1
b[1] + b[2] = 0
b[3] + b[4] = 0
end restrict

In this more economical formulation the initializer specifies only the two free parameters in φ (5
elements in β minus 3 restrictions). There is no call to give values for ψ since α is unrestricted.

Scale removal
Consider a simpler version of the restriction discussed in the previous section, namely,

restrict
b[1] = 1
b[1] + b[2] = 0
end restrict

This restriction comprises a substantive, testable requirement — that β1 and β2 sum to zero —
and a normalization or scaling, β1 = 1. The question arises, might it be easier and more reliable
to maximize the likelihood without imposing β1 = 1?10 If so, we could record this normalization,
remove it for the purpose of maximizing the likelihood, then reimpose it by scaling the result.
Unfortunately it is not possible to say in advance whether “scale removal” of this sort will give
better results, for any particular estimation problem. However, this does seem to be the case more
often than not. Gretl therefore performs scale removal where feasible, unless you

• explicitly forbid this, by giving the --no-scaling option flag to the restrict command; or

• provide a specific vector of initial values; or

10 As a numerical matter, that is. In principle this should make no difference.
Chapter 25. Cointegration and Vector Error Correction Models 215

• select the LBFGS algorithm for maximization.

Scale removal is deemed infeasible if there are any cross-column restrictions on β, or any non-
homogeneous restrictions involving more than one element of β.
In addition, experimentation has suggested to us that scale removal is inadvisable if the system is
just identified with the normalization(s) included, so we do not do it in that case. By “just identified”
we mean that the system would not be identified if any of the restrictions were removed. On that
criterion the above example is not just identified, since the removal of the second restriction would
not affect identification; and gretl would in fact perform scale removal in this case unless the user
specified otherwise.
 Chapter 26

Multivariate models

By a multivariate model we mean one that includes more than one dependent variable. Certain
specific types of multivariate model for time-series data are discussed elsewhere: chapter 24 deals
with VARs and chapter 25 with VECMs. Here we discuss two general sorts of multivariate model,
implemented in gretl via the system command: SUR systems (Seemingly Unrelated Regressions),
in which all the regressors are taken to be exogenous and interest centers on the covariance of the
error term across equations; and simultaneous systems, in which some regressors are assumed to
be endogenous.
In this chapter we give an account of the syntax and use of the system command and its compan-
ions, restrict and estimate; we also explain the options and accessors available in connection
with multivariate models.

26.1 The system command

The specification of a multivariate system takes the form of a block of statements, starting with
system and ending with end system. Once a system is specified it can estimated via various
methods, using the estimate command, with or without restrictions, which may be imposed via
the restrict command.

Starting a system block

The first line of a system block may be augmented in either (or both) of two ways:

• An estimation method is specified for the system. This is done by following system with
an expression of the form method=estimator, where estimator must be one of ols (Ordinary
Least Squares), tsls (Two-Stage Least Squares), sur (Seemingly Unrelated Regressions), 3sls
(Three-Stage Least Squares), liml (Limited Information Maximum Likelihood) or fiml (Full
Information Maximum Likelihood). Two examples:
system method=sur
system method=fiml

OLS, TSLS and LIML are, of course, single-equation methods rather than true system estima-
tors; they are included to facilitate comparisons.

• The system is assigned a name. This is done by giving the name first, followed by a back-
arrow, “<-”, followed by system. If the name contains spaces it must be enclosed in double-
quotes. Here are two examples:
sys1 <- system
"System 1" <- system

Note, however, that this naming method is not available within a user-defined function, only
in the main body of a gretl script.

If the initial system line is augmented in the first way, the effect is that the system is estimated as
soon as its definition is completed, using the specified method. The effect of the second option is

216
Chapter 26. Multivariate models 217

that the system can then be referenced by the assigned name for the purposes of the restrict and
estimate commands; in the gretl GUI an additional effect is that an icon for the system is added
to the “Session view”.
These two possibilities can be combined, as in

mysys <- system method=3sls

In this example the system is estimated immediately via Three-Stage Least Squares, and is also
available for subsequent use under the name mysys.
If the system is not named via the back-arrow mechanism, it is still available for subsequent use
via restrict and estimate; in this case you should use the generic name $system to refer to the
last-defined multivariate system.

The body of a system block

The most basic element in the body of a system block is the equation statement, which is used
to specify each equation within the system. This takes the same form as the regression specifica-
tion for single-equation estimators, namely a list of series with the dependent variable given first,
followed by the regressors, with the series given either by name or by ID number (order in the
dataset). A system block must contain at least two equation statements, and for systems without
endogenous regressors these statements are all that is required. So, for example, a minimal SUR
specification might look like this:

system method=sur
equation y1 const x1
equation y2 const x2
end system

For simultaneous systems it is necessary to determine which regressors are endogenous and which
exogenous. By default all regressors are treated as exogenous, except that any variable that appears
as the dependent variable in one equation is automatically treated as endogeous if it appears as a
regressor elsewhere. However, an explicit list of endogenous regressors may be supplied follow-
ing the equations lines: this takes the form of the keyword endog followed by the names or ID
numbers of the relevant regressors.
When estimation is via TSLS or 3SLS it is possible to specify a particular set of instruments for each
equation. This is done by giving the equation lists in the format used with the tsls command:
first the dependent variable, then the regressors, then a semicolon, then the instruments, as in

system method=3sls
equation y1 const x11 x12 ; const x11 z1
equation y2 const x21 x22 ; const x21 z2
end system

In this case, as in tsls, any regressors that are not also listed as instruments are treated as en-
dogenous, so in the example above x11 and x21 are treated as exogenous while x21 and x22 are
endogenous, and instrumented by z1 and z2 respectively.
One more sort of statement is allowed in a system block: that is, the keyword identity followed by
an equation that defines an accounting relationship, rather then a stochastic one, between variables.
For example,

identity Y = C + I + G + X

There can be more than one identity in a system block. But note that these statements are specific
to estimation via FIML; they are ignored for other estimators.
Chapter 26. Multivariate models 218

Equation systems within functions

It is also possible to define a multivariate system in a programmatic way. This is useful if the precise
specification of the system depends on some input parameters that are not known in advance, but
are given when the script is actually run.1
The relevant syntax is given by the equations keyword (note the plural), which replaces the block
of equation lines in the standard form. An equations line requires two list arguments. The first
list must contain all series on the left-hand side of the system; thus the number of elements in this
first list determines the number of equations in the system. The second list is a “list of lists”, which
is a special variant of the list data type. That is, for each equation of the system you must provide a
list of right-hand side variables, and the lists for all equations must be joined by assigning them to
another list object; in that assignment, they must be separated by a semicolon. Here is an example
for a two-equation system:

list syslist = xlist1 ; xlist2

Therefore, specifying a system generically in this way just involves building the necessary list
arguments, as shown in the following example:

open denmark
list LHS = LRM LRY
list RHS1 = const LRM(-1) IBO(-1) IDE(-1)
list RHS2 = const LRY(-1) IBO(-1)
list RHS = RHS1 ; RHS2
system method=ols
equations LHS RHS
end system

As mentioned above, the option of assigning a specific name to a system is not available within
functions, but the generic identifier $system can be used to similar effect. The following example
shows how one can define a system, estimate it via two methods, apply a restriction, then re-
estimate it subject to the restriction.

function void anonsys(series x, series y)

system
equation x const
equation y const
end system
estimate $system method=ols
estimate $system method=sur
restrict $system
b[1,1] - b[2,1] = 0
end restrict
estimate $system method=ols
end function

26.2 Restriction and estimation

The behavior of the restrict command is a little different for multivariate systems as compared
with single-equation models.
In the single-equation case, restrict refers to the last-estimated model, and once the command is
completed the restriction is tested. In the multivariate case, you must give the name of the system
to which the restriction is to be applied (or $system to refer to the last-defined system), and the
1 This feature was added in version 1.9.7 of gretl.
Chapter 26. Multivariate models 219

effect of the command is just to attach the restriction to the system; testing is not done until the
next estimate command is given. In addition, in the system case the default is to produce full
estimates of the restricted model; if you are not interested in the full estimates and just want the
test statistic you can append the --quiet option to estimate.
A given system restriction remains in force until it is replaced or removed. To return a system to
its unrestricted state you can give an empty restrict block, as in

restrict sysname
end restrict

As illustrated above, you can use the method tag to specify an estimation method with the estimate
command. If the system has already been estimated you can omit this tag and the previous method
is used again.
The estimate command is the main locus for options regarding the details of estimation. The
available options are as follows:

• If the estimation method is SUR or 3SLS and the --iterate flag is given, the estimator will be
iterated. In the case of SUR, if the procedure converges the results are maximum likelihood
estimates. Iteration of three-stage least squares, however, does not in general converge on the
full-information maximum likelihood results. This flag is ignored for other estimators.

• If the equation-by-equation estimators OLS or TSLS are chosen, the default is to apply a de-
grees of freedom correction when calculating standard errors. This can be suppressed using
the --no-df-corr flag. This flag has no effect with the other estimators; no degrees of free-
dom correction is applied in any case.

• By default, the formula used in calculating the elements of the cross-equation covariance
matrix is
û0 ûj
σ̂ij = i
T
where T is the sample size and ûi is the vector of residuals from equation i. But if the
--geomean flag is given, a degrees of freedom correction is applied: the formula is

û0i ûj
σ̂ij = q
(T − ki )(T − kj )

where ki denotes the number of independent parameters in equation i.

• If an iterative method is specified, the --verbose option calls for printing of the details of
the iterations.

• When the system estimator is SUR or 3SLS the cross-equation covariance matrix is initially
estimated via OLS or TSLS, respectively. In the case of a system subject to restrictions the
question arises: should the initial single-equation estimator be restricted or unrestricted?
The default is the former, but the --unrestrict-init flag can be used to select unrestricted
initialization. (Note that this is unlikely to make much difference if the --iterate option is
given.)

26.3 System accessors

After system estimation various matrices may be retrieved for further analysis. Let g denote the
numberP of equations in the system and let K denote the total number of estimated parameters
(K = i ki ). The accessors $uhat and $yhat get T × g matrices holding the residuals and fitted
values respectively. The accessor $coeff gets the stacked K-vector of parameter estimates; $vcv
Chapter 26. Multivariate models 220

gets the K ×K variance matrix of the parameter estimates; and $sigma gets the g ×g cross-equation
covariance matrix, Σ̂.
A test statistic for the hypothesis that Σ is diagonal can be retrieved as $diagtest and its p-value
as $diagpval. This is the Breusch–Pagan test except when the estimator is (unrestricted) iterated
SUR, in which case it’s a Likelihood Ratio test. The Breusch–Pagan test is computed as
g i−1
X X
2
LM = T rij
i=2 j=1

q
where rij = σ̂ij / σ̂ii σ̂jj ; the LR test is
 
g
X
LR = T  log σ̂i2 − log |Σ̂|
i=1

where σ̂i2 is û0i ûi /T from the individual OLS regressions. In both cases the test statistic is distrib-
uted asymptotically as χ 2 with g(g − 1)/2 degrees of freedom.

Structural and reduced forms

Systems of simultaneous systems can be represented in structural form as

Γ yt = A1 yt−1 + A2 yt−2 + · · · + Ap yt−p + Bxt + t

where yt represents the vector of endogenous variables in period t, xt denotes the vector of ex-
ogenous variables, and p is the maximum lag of the endogenous regressors. The structural-form
matrices can be retrieved as $sysGamma, $sysA and $sysB respectively. If yt is m × 1 and xt is
n × 1, then Γ is m × m and B is m × n. If the system contains no lags of the endogenous variables
then the A matrix is not defined, otherwise A is the horizontal concatenation of A1 , . . . , Ap , and is
therefore m × mp.
From the structural form it is straightforward to obtain the reduced form, namely,
 
p
X
−1 
yt = Γ Ai yt−i  + Γ −1 Bxt + vt
i=1

where vt ≡ Γ −1 t . The reduced form is used by gretl to generate forecasts in response to the fcast
command. This means that — in contrast to single-equation estimation — the values produced via
fcast for a static, within-sample forecast will in general differ from the fitted values retrieved via
$yhat. The fitted values for equation i represent the expectation of yti conditional on the contem-
poraneous values of all the regressors, while the fcast values are conditional on the exogenous
and predetermined variables only.
The above account has to be qualified for the case where a system is set up for estimation via TSLS
or 3SLS using a specific list of instruments per equation, as described in section 26.1. In that case
it is possible to include more endogenous regressors than explicit equations (although, of course,
there must be sufficient instruments to achieve identification). In such systems endogenous re-
gressors that have no associated explicit equation are treated “as if” exogenous when constructing
the structural-form matrices. This means that forecasts are conditional on the observed values of
the “extra” endogenous regressors rather than solely on the values of the exogenous and predeter-
mined variables.
 Chapter 27

Forecasting

27.1 Introduction
In some econometric contexts forecasting is the prime objective: one wants estimates of the future
values of certain variables to reduce the uncertainty attaching to current decision making. In other
contexts where real-time forecasting is not the focus prediction may nonetheless be an important
moment in the analysis. For example, out-of-sample prediction can provide a useful check on
the validity of an econometric model. In other cases we are interested in questions of “what if”:
for example, how might macroeconomic outcomes have differed over a certain period if a different
policy had been pursued? In the latter cases “prediction” need not be a matter of actually projecting
into the future but in any case it involves generating fitted values from a given model. The term
“postdiction” might be more accurate but it is not commonly used; we tend to talk of prediction
even when there is no true forecast in view.
This chapter offers an overview of the methods available within gretl for forecasting or prediction
(whether forward in time or not) and explicates some of the finer points of the relevant commands.

27.2 Saving and inspecting fitted values

In the simplest case, the “predictions” of interest are just the (within sample) fitted values from an
econometric model. For the single-equation linear model, yt = Xt β + ut , these are ŷt = Xt β̂.
In command-line mode, the ŷ series can be retrieved, after estimating a model, using the accessor
$yhat, as in

series yh = $yhat

If the model in question takes the form of a system of equations, $yhat returns a matrix, each
column of which contains the fitted values for a particular dependent variable. To extract the fitted
series for, e.g., the dependent variable in the second equation, do

matrix Yh = $yhat
series yh2 = Yh[,2]

Having obtained a series of fitted values, you can use the fcstats function to produce a vector of
statistics that characterize the accuracy of the predictions (see section 27.4 below).
The gretl GUI offers several ways of accessing and examining within-sample predictions. In the
model display window the Save menu contains an item for saving fitted values, the Graphs menu
allows plotting of fitted versus actual values, and the Analysis menu offers a display of actual, fitted
and residual values.

27.3 The fcast command

The fcast command generates predictions based on the last estimated model. Several questions
arise here: How to control the range over which predictions are generated? How to control the
forecasting method (where a choice is available)? How to control the printing and/or saving of the
results? Basic answers can be found in the Gretl Command Reference; we add some more details
here.

221
Chapter 27. Forecasting 222

The forecast range

The range defaults to the currently defined sample range. If this remains unchanged following esti-
mation of the model in question, the forecast will be “within sample” and (with some qualifications
noted below) it will essentially duplicate the information available via the retrieval of fitted values
(see section 27.2 above).
A common situation is that a model is estimated over a given sample and then forecasts are
wanted for a subsequent out-of-sample range. The simplest way to accomplish this is via the
--out-of-sample option to fcast. For example, assuming we have a quarterly time-series dataset
containing observations from 1980:1 to 2008:4, four of which are to be reserved for forecasting:

# reserve the last 4 observations

smpl 1980:1 2007:4
ols y 0 xlist
fcast --out-of-sample

This will generate a forecast from 2008:1 to 2008:4.

There are two other ways of adjusting the forecast range, offering finer control:

• Use the smpl command to adjust the sample range prior to invoking fcast.

• Use the optional startobs and endobs arguments to fcast (which should come right after the
command word). These values set the forecast range independently of the sample range.

What if one wants to generate a true forecast that goes beyond the available data? In that case
one can use the dataset command with the addobs parameter to add extra observations before
forecasting. For example:

# use the entire dataset, which ends in 2008:4

ols y 0 xlist
dataset addobs 4
fcast 2009:1 2009:4

But this will work as stated only if the set of regressors in xlist does not contain any stochastic
regressors other than lags of y. The dataset addobs command attempts to detect and extrapolate
certain common deterministic variables (e.g., time trend, periodic dummy variables). In addition,
lagged values of the dependent variable can be supported via a dynamic forecast (see below for
discussion of the static/dynamic distinction). But “future” values of any other included regressors
must be supplied before such a forecast is possible. Note that specific values in a series can be
set directly by date, for example: x1[2009:1] = 120.5. Or, if the assumption of no change in the
regressors is warranted, one can do something like this:

loop t=2009:1..2009:4
loop foreach i xlist
$i[t] = $i[2008:4]
endloop
endloop

Static, dynamic and rolling forecasts

The distinction between static and dynamic forecasts applies only to dynamic models, i.e., those
that feature one or more lags of the dependent variable. The simplest case is the AR(1) model,

yt = α0 + α1 yt−1 + t (27.1)
Chapter 27. Forecasting 223

In some cases the presence of a lagged dependent variable is implicit in the dynamics of the error
term, for example

yt = β + ut
ut = ρut−1 + t

which implies that

yt = (1 − ρ)β + ρyt−1 + t

Suppose we want to forecast y for period s using a dynamic model, say (27.1) for example. If
we have data on y available for period s − 1 we could form a fitted value in the usual way: ŷs =
α̂0 + α̂1 ys−1 . But suppose that data are available only up to s − 2. In that case we can apply the
chain rule of forecasting:

ŷs−1 = α̂0 + α̂1 ys−2

ŷs = α̂0 + α̂1 ŷs−1

This is what is called a dynamic forecast. A static forecast, on the other hand, is simply a fitted
value (even if it happens to be computed out-of-sample).

Printing and saving forecasts

To be written.

27.4 Univariate forecast evaluation statistics

Let yt be the value of a variable of interest at time t and let ft be a forecast of yt . We define the
forecast error as et = yt − ft . Given a series of T observations and associated forecasts we can
construct several measures of the overall accuracy of the forecasts. Some commonly used measures
are the Mean Error (ME), Mean Squared Error (MSE), Root Mean Squared Error (RMSE), Mean Absolute
Error (MAE), Mean Percentage Error (MPE) and Mean Absolute Percentage Error (MAPE). These are
defined as follows.
v
T T T T
u
1 X 1 X 2 u1 1 X
u X
ME = et MSE = et RMSE = t et2 MAE = |et |
T t=1 T t=1 T t=1 T t=1

T T
1 X et 1 X |et |
MPE = 100 MAPE = 100
T t=1 yt T t=1 yt

A further relevant statistic is Theil’s U (Theil, 1966), defined as the positive square root of

T −1
!2  T −1 !2 −1
1 X ft+1 − yt+1 1 X yt+1 − yt
U2 = · 
T t=1 yt T t=1 yt

The more accurate the forecasts, the lower the value of Theil’s U , which has a minimum of 0.1
This measure can be interpreted as the ratio of the RMSE of the proposed forecasting model to the
RMSE of a naïve model which simply predicts yt+1 = yt for all t. The naïve model yields U = 1;
values less than 1 indicate an improvement relative to this benchmark and values greater than 1 a
deterioration.
1 This statistic is sometimes called U , to distinguish it from a related but different U defined in an earlier work by
2
Theil (1961). It seems to be generally accepted that the later version of Theil’s U is a superior statistic, so we ignore the
earlier version here.
Chapter 27. Forecasting 224

In addition, Theil (1966, pp. 33–36) proposed a decomposition of the MSE which can be useful in
evaluating a set of forecasts. He showed that the MSE could be broken down into three non-negative
components as follows
 2  2  
MSE = f¯ − ȳ + sf − r sy + 1 − r 2 s 2 y

where f¯ and ȳ are the sample means of the forecasts and the observations, sf and sy are the re-
spective standard deviations (using T in the denominator), and r is the sample correlation between
y and f . Dividing through by MSE we get
 2  2
f¯ − ȳ sf − r sy 1 − r 2 sy2


+ + =1 (27.2)
MSE MSE MSE

Theil labeled the three terms on the left-hand side of (27.2) the bias proportion (U M ), regression
proportion (U R ) and disturbance proportion (U D ), respectively. If y and f represent the in-sample
observations of the dependent variable and the fitted values from a linear regression then the first
two components, U M and U R , will be zero (apart from rounding error), and the entire MSE will be
accounted for by the unsystematic part, U D . In the case of out-of-sample prediction, however (or
“prediction” over a sub-sample of the data used in the regression), U M and U R are not necessarily
close to zero, although this is a desirable property for a forecast to have. U M differs from zero if
and only if the mean of the forecasts differs from the mean of the realizations, and U R is non-zero
if and only if the slope of a simple regression of the realizations on the forecasts differs from 1.
The above-mentioned statistics are printed as part of the output of the fcast command. They can
also be retrieved in the form of a column vector using the function fcstats, which takes two series
arguments corresponding to y and f . The vector returned is
 0
ME MSE MAE MPE MAPE U UM UR UD

(Note that the RMSE is not included since it can easily be obtained given the MSE.) The series given
as arguments to fcstats must not contain any missing values in the currently defined sample
range; use the smpl command to adjust the range if needed.

27.5 Forecasts based on VAR models

To be written.

27.6 Forecasting from simultaneous systems

To be written.
 Chapter 28

The Kalman Filter

28.1 Preamble
The Kalman filter has been used “behind the scenes” in gretl for quite some time, in computing
ARMA estimates. But user access to the Kalman filter is new and it has not yet been tested to any
great extent. We have run some tests of relatively simple cases against the benchmark of SsfPack
Basic. This is state-space software written by Koopman, Shephard and Doornik and documented in
Koopman, Shephard and Doornik (1999). It requires Doornik’s ox program. Both ox and SsfPack
are available as free downloads for academic use but neither is open-source; see http://www.
ssfpack.com. Since Koopman is one of the leading researchers in this area, presumably the results
from SsfPack are generally reliable. To date we have been able to replicate the SsfPack results in
gretl with a high degree of precision.
We welcome both success reports and bug reports.

28.2 Notation
It seems that in econometrics everyone is happy with y = Xβ + u, but we can’t, as a community,
make up our minds on a standard notation for state-space models. Harvey (1989), Hamilton (1994),
Harvey and Proietti (2005) and Pollock (1999) all use different conventions. The notation used here
is based on James Hamilton’s, with slight variations.
A state-space model can be written as

ξ t+1 = Ft ξ t + vt (28.1)
yt = A0t xt + H0t ξ t + wt (28.2)

where (28.1) is the state transition equation and (28.2) is the observation or measurement equation.
The state vector, ξ t , is (r × 1) and the vector of observables, yt , is (n × 1); xt is a (k × 1) vector of
exogenous variables. The (r × 1) vector vt and the (n × 1) vector wt are assumed to be vector white
noise:

E(vt v0s ) = Qt for t = s, otherwise 0

E(wt w0s ) = Rt for t = s, otherwise 0

The number of time-series observations will be denoted by T . In the special case when Ft = F,
Ht = H, At = A, Qt = Q and Rt = R, the model is said to be time-invariant.

The Kalman recursions

Using this notation, and assuming for the moment that vt and wt are mutually independent, the
Kalman recursions can be written as follows.
Initialization is via the unconditional mean and variance of ξ 1 :

ξ 1|0 = E(ξ
ξ̂ ξ 1)
n  0 o
ξ 1 ) ξ 1 − E(ξ
P1|0 = E ξ 1 − E(ξ ξ 1)

225
Chapter 28. The Kalman Filter 226

ξ 1|0 = 0 and
Usually these are given by ξ̂

vec(P1|0 ) = [Ir 2 − F ⊗ F]−1 · vec(Q) (28.3)

but see below for further discussion of the initial variance.
Iteration then proceeds in two steps.1 First we update the estimate of the state

ξ t+1|t = Ft ξ̂
ξ̂ ξ t|t−1 + Kt et (28.4)
where et is the prediction error for the observable:

et = yt − A0t xt − H0t ξ̂
ξ t|t−1
and Kt is the gain matrix, given by
Kt = Ft Pt|t−1 Ht Σ −1
t (28.5)
with
Σ t = H0t Pt|t−1 Ht + Rt

The second step then updates the estimate of the variance of the state using
Pt+1|t = Ft Pt|t−1 F0t − Kt Σ t K0t + Qt (28.6)

Cross-correlated disturbances
The formulation given above assumes mutual independence of the disturbances in the state and
observation equations, vt and wt . This assumption holds good in many practical applications, but
a more general formulation allows for cross-correlation. In place of (28.1)–(28.2) we may write
ξ t+1 = Ft ξ t + Bt ε t
yt = A0t xt + H0t ξ t + Ct ε t
where ε t is a (p × 1) disturbance vector, all the elements of which have unit variance, Bt is (r × p)
and Ct is (n × p).
The no-correlation case is nested thus: define v∗ ∗
t and wt as modified versions of vt and wt , scaled
such that each element has unit variance, and let
" ∗ #
vt
εt =
w∗
t

so that p = r + n. Then (suppressing time subscripts for simplicity) let

h .. i
B = Γ r ×r .. 0r ×n
h .. i
C = 0n×r .. Λ n×n

where Γ and Λ are lower triangular matrices satisfying Q = Γ Γ 0 and R = Λ Λ 0 respectively. The zero
sub-matrices in the above expressions for B and C produce the case of mutual independence; this
corresponds to the condition BC0 = 0.
In the general case p is not necessarily equal to r + n, and BC0 may be non-zero. This means that
the Kalman gain equation (28.5) must be modified as
Σ−1
Kt = (Ft Pt|t−1 Ht + Bt C0t )Σ t (28.7)
Otherwise, the equations given earlier hold good, if we write BB0 in place of Q and CC0 in place of
R.
In the account of gretl’s Kalman facility below we take the uncorrelated case as the baseline, but
add remarks on how to handle the correlated case where applicable.
1 For a justification of the following formulae see the classic book by Anderson and Moore (1979) or, for a more modern

treatment, Pollock (1999) or Hamilton (1994). A transcription of R. E. Kalman’s original paper (Kalman, 1960) is available
at http://www.cs.unc.edu/~welch/kalman/kalmanPaper.html.
Chapter 28. The Kalman Filter 227

28.3 Intended usage

The Kalman filter can be used in three ways: two of these are the classic forward and backward
pass, or filtering and smoothing respectively; the third use is simulation. In the filtering/smoothing
case you have the data yt and you want to reconstruct the states ξ t (and the forecast errors as a by-
product), but we may also have a computational apparatus that does the reverse: given artificially-
generated series wt and vt , generate the states ξ t (and the observables yt as a by-product).
The usefulness of the classical filter is well known; the usefulness of the Kalman filter as a sim-
ulation tool may be huge too. Think for instance of Monte Carlo experiments, simulation-based
inference—see Gourieroux and Monfort (1996) — or Bayesian methods, especially in the context of
the estimation of DSGE models.

28.4 Overview of syntax

Using the Kalman filter in gretl is a two-step process. First you set up your filter, using a block
of commands starting with kalman and ending with end kalman— much like the gmm command.
Then you invoke the functions kfilter, ksmooth or ksimul to do the actual work. The next two
sections expand on these points.

28.5 Defining the filter

Each line within the kalman . . . end kalman block takes the form

keyword value

where keyword represents a matrix, as shown below. (An additional matrix which may be useful in
some cases is introduced later under the heading “Constant term in the state transition”.)

Keyword Symbol Dimensions

obsy y T ×n
obsymat H r ×n
obsx x T ×k
obsxmat A k×n
obsvar R n×n
statemat F r ×r
statevar Q r ×r
inistate ξ 1|0
ξ̂ r ×1
inivar P1|0 r ×r

For the data matrices y and x the corresponding value may be the name of a predefined matrix, the
name of a data series, or the name of a list of series.2
For the other inputs, value may be the name of a predefined matrix or, if the input in question
happens to be (1×1), the name of a scalar variable or a numerical constant. If the value of a
coefficient matrix is given as the name of a matrix or scalar variable, the input is not “hard-wired”
into the Kalman structure, rather a record is made of the name of the variable and on each run
of a Kalman function (as described below) its value is re-read. It is therefore possible to write one
kalman block and then do several filtering or smoothing passes using different sets of coefficients.3
2 Note that the data matrices obsy and obsx have T rows. That is, the column vectors y and x in (28.1) and (28.2) are
t t
in fact the transposes of the t-dated rows of the full matrices.
3 Note, however, that the dimensions of the various input matrices are defined via the initial kalman set-up and it is an

error if any of the matrices are changed in size.

Chapter 28. The Kalman Filter 228

An example of this technique is provided later, in the example scripts 28.1 and 28.2. This facility
to alter the values of the coefficients between runs of the filter is to be distinguished from the case
of time-varying matrices, which is discussed below.
Not all of the above-mentioned inputs need be specified in every case; some are optional. (In
addition, you can specify the matrices in any order.) The mandatory elements are y, H, F and Q, so
the minimal kalman block looks like this:

kalman
obsy y
obsymat H
statemat F
statevar Q
end kalman

The optional matrices are listed below, along with the implication of omitting the given matrix.

Keyword If omitted. . .

obsx no exogenous variables in observation equation

obsxmat no exogenous variables in observation equation
obsvar no disturbance term in observation equation
inistate ξ 1|0 is set to a zero vector
ξ̂
inivar P1|0 is set automatically

It might appear that the obsx (x) and obsxmat (A) matrices must go together — either both are
given or neither is given. But an exception is granted for convenience. If the observation equation
includes a constant but no additional exogenous variables, you can give a (1×n) value for A without
having to specify obsx. More generally, if the row dimension of A is 1 greater than the column
dimension of x, it is assumed that the first element of A is associated with an implicit column of
1s.
Regarding the automatic initialization of P1|0 (in case no inivar input is given): by default this
is done as in equation (28.3). However, this method is applicable only if all the eigenvalues of F
lie inside the unit circle. If this condition is not satisfied we instead apply a diffuse prior, setting
P1|0 = κIr with κ = 107 . If you wish to impose this diffuse prior from the outset, append the option
flag --diffuse to the end kalman statement.4

Time-varying matrices
Any or all of the matrices obsymat, obsxmat, obsvar, statemat and statevar may be time-
varying. In that case the value corresponding to the matrix keyword should be given in a special
form: the name of an existing matrix plus a function call which modifies that matrix, separated by
a semicolon. Note that in this case you must use a matrix variable, even if the matrix in question
happens to be 1 × 1.
For example, suppose the matrix H is time-varying. Then we might write

obsymat H ; modify_H(&H, theta)

where modify_H is a user-defined function which modifies matrix H (and theta is a suitable addi-
tional argument to that function, if required).
4 Initialization of the Kalman filter outside of the case where equation (28.3) applies has been the subject of much

discussion in the literature—see for example de Jong (1991), Koopman (1997). At present gretl does not implement any
of the more elaborate proposals that have been made.
Chapter 28. The Kalman Filter 229

The above is just an illustration: the matrix argument does not have to come first, and the function
can have as many arguments as you like. The essential point is that the function must modify the
specified matrix, which requires that it be given as an argument in “pointer” form (preceded by &).
The function need not return any value directly; if it does, that value is ignored.
Such matrix-modifying functions will be called at each time-step of the filter operation, prior to
performing any calculations. They have access to the current time-step of the Kalman filter via the
internal variable $kalman_t, which has value 1 on the first step, 2 on the second, and so on, up
to step T . They also have access to the previous n-vector of forecast errors, et−1 , under the name
$kalman_uhat. When t = 1 this will be a zero vector.

Correlated disturbances
Defining a filter in which the disturbances vt and wt are correlated involves one modification to the
account given above. If you append the --cross option flag to the end kalman statement, then
the matrices corresponding to the keywords statevar and obsvar are interpreted not as Q and R
but rather as B and C as discussed in section 28.2. Gretl then computes Q = BB0 and R = CC0 as
well as the cross-product BC0 and utilizes the modified expression for the gain as given in equation
(28.7). As mentioned above, B should be (r × p) and C should be (n × p), where p is the number of
elements in the combined disturbance vector ε t .

Constant term in the state transition

In some applications it is useful to be able to represent a constant term in the state transition
equation explicitly; that is, equation (28.1) becomes

ξ t+1 = µ + Ft ξ t + vt (28.8)

This is never strictly necessary; the system (28.1) and (28.2) is general enough to accommodate
such a term, by absorbing it as an extra (unvarying) element in the state vector. But this comes
at the cost of expanding all the matrices that touch the state (ξξ , F, v, Q, H), making the model
relatively awkward to formulate and forecasts relatively expensive to compute.
As a simple illustration, consider a univariate model in which the state, st , is just a random walk
with drift µ and the observed variable, yt , is the state plus white noise:

st+1 = µ + st + vt (28.9)
yt = st + wt (28.10)

Putting this into the standard form of (28.1) and (28.2) we get:

σv2
" # " #" # " # " #
st+1 1 1 st vt 0
= + , Q=
µ 0 1 µ 0 0 0
" #
h i st
yt = 1 0 + wt
µ

In such a simple case the notational and computational burden is not very great; nonetheless it is
clearly more “natural” to express this system in the form of (28.9) and (28.10) and in a multivariate
model the gain in parsimony could be substantial.
For this reason we support the use of an additional named matrix in the kalman setup, namely
stconst. This corresponds to µ in equation (28.8); it should be an r × 1 vector (or if r = 1 may be
given as the name of a scalar variable). The use of stconst in setting up a filter corresponding to
(28.9) and (28.10) is shown below.

matrix H = {1}
matrix R = {1}
Chapter 28. The Kalman Filter 230

matrix F = {1}
matrix Q = {1}
matrix mu = {0.05}

kalman
obsy y
obsymat H
obsvar R
statemat F
statevar Q
stconst mu
end kalman

Handling of missing values

It is acceptable for the data matrices, obsy and obsx, to contain missing values. In this case the
filtering operation will work around the missing values, and the ksmooth function can be used to
obtain estimates of these values. However, there are two points to note.
First, gretl’s default behavior is to skip missing observations when constructing matrices from data
series. To change this, use the set command thus:

set skip_missing off

Second, the handling of missing values is not yet quite right for the case where the observable
vector yt contains more than one element. At present, if any of the elements of yt are missing
the entire observation is ignored. Clearly it should be possible to make use of any non-missing
elements, and this is not very difficult in principle, it’s just awkward and is not implemented yet.

Persistence and identity of the filter

At present there is no facility to create a “named filter”. Only one filter can exist at any point
in time, namely the one created by the last kalman block.5 If a filter is already defined, and you
give a new kalman block, the old filter is over-written. Otherwise the existing filter persists (and
remains available for the kfilter, ksmooth and ksimul functions) until either (a) the gretl session
is terminated or (b) the command delete kalman is given.

28.6 The kfilter function

Once a filter is established, as discussed in the previous section, kfilter can be used to run a
forward, forecasting pass. This function returns a scalar code: 0 for successful completion, or 1
if numerical problems were encountered. On successful completion, two scalar accessor variables
become available: $kalman_lnl, which gives the overall log-likelihood under the joint normality
assumption,  
T T
1 X X
0 −1 
`=− nT log(2π ) + log |Σ
Σt | + et Σ t et
2 t=1 t=1

and $kalman_s2, which gives the estimated variance,

T
1 X 0 −1
σ̂ 2 = e Σ et
nT t=1 t t
5 This is not quite true: more precisely, there can be no more than one Kalman filter at each level of function execution.

That is, if a gretl script creates a Kalman filter, a user-defined function called from that script may also create a filter,
without interfering with the original one.
Chapter 28. The Kalman Filter 231

(but see below for modifications to these formulae for the case of a diffuse prior). In addition the
accessor $kalman_llt gives a (T × 1) vector, element t of which is
1h i
`t = − Σt | + e0t Σ −1
n log(2π ) + log |Σ t et
2

The kfilter function does not require any arguments, but up to five matrix quantities may be
retrieved via optional pointer arguments. Each of these matrices has T rows, one for each time-
step; the contents of the rows are shown in the following listing.

1. Forecast errors for the observable variables: e0t , n columns.

Σt )0 , n(n + 1)/2 columns.

2. Variance matrix for the forecast errors: vech(Σ
0
ξ t|t−1 , r columns.
3. Estimate of the state vector: ξ̂

4. MSE of estimate of the state vector: vech(Pt|t−1 )0 , r (r + 1)/2 columns.

5. Kalman gain: vec(Kt )0 , r n columns.

Unwanted trailing arguments can be omitted, otherwise unwanted arguments can be skipped by
using the keyword null. For example, the following call retrieves the forecast errors in the matrix
E and the estimate of the state vector in S:

matrix E S
kfilter(&E, null, &S)

Matrices given as pointer arguments do not have to be correctly dimensioned in advance; they will
be resized to receive the specified content.
Further note: in general, the arguments to kfilter should all be matrix-pointers, but under two
conditions you can give a pointer to a series variable instead. The conditions are: (i) the matrix
in question has just one column in context (for example, the first two matrices will have a single
column if the length of the observables vector, n, equals 1) and (ii) the time-series length of the
filter is equal to the current gretl sample size.

Likelihood under the diffuse prior

There seems to be general agreement in the literature that the log-likelihood calculation should
be modified in the case of a diffuse prior for P1|0 . However, it is not clear to us that there is a
well-defined “correct” method for this. At present we emulate SsfPack (see Koopman et al. (1999)
and section 28.1). In case P1|0 = κIr , we set d = r and calculate
 
T T
1
e0t Σ −1
X X
`=− (nT − d) log(2π ) + log |Σ
Σt | + t et − d log(κ)

2 t=1 t=1

and
T
1
e0 Σ −1 et
X
σ̂ 2 =
nT − d t=1 t t

28.7 The ksmooth function

This function returns the (T × r ) matrix of smoothed estimates of the state vector — that is, esti-
0
mates based on all T observations: row t of this matrix holds ξ̂ ξ t|T . This function has no required
arguments but it offers one optional matrix-pointer argument, which retrieves the variance of the
smoothed state estimate, Pt|T . The latter matrix is (T × r (r + 1)/2); each row is in transposed vech
form. Examples:
Chapter 28. The Kalman Filter 232

matrix S = ksmooth() # smoothed state only

matrix P
S = ksmooth(&P) # the variance is wanted

These values are computed via a backward pass of the filter, from t = T to t = 1, as follows:

Lt = Ft − Kt H0t
ut−1 = Ht Σ −1 0
t et + Lt ut

Ut−1 = Ht Σ −1 0 0
t Ht + Lt Ut Lt

ξ t|T = ξ̂
ξ̂ ξ t|t−1 + Pt|t−1 ut−1
Pt|T = Pt|t−1 − Pt|t−1 Ut−1 Pt|t−1

with initial values uT = 0 and UT = 0.6

This iteration is preceded by a special forward pass in which the matrices Kt , Σ −1 ξ t|t−1 and Pt|t−1
t , ξ̂
are stored for all t. If F is time-varying, its values for all t are stored on the forward pass, and
similarly for H.

28.8 The ksimul function

This simulation function takes up to three arguments. The first, mandatory, argument is a (T × r )
matrix containing artificial disturbances for the state transition equation: row t of this matrix
represents v0t . If the current filter has a non-null R (obsvar) matrix, then the second argument
should be a (T × n) matrix containing artificial disturbances for the observation equation, on the
same pattern. Otherwise the second argument should be given as null. If r = 1 you may give a
series for the first argument, and if n = 1 a series is acceptable for the second argument.
Provided that the current filter does not include exogenous variables in the observation equation
(obsx), the T for simulation need not equal that defined by the original obsy data matrix: in effect T
is temporarily redefined by the row dimension of the first argument to ksimul. Once the simulation
is completed, the T value associated with the original data is restored.
The value returned by ksimul is a (T × n) matrix holding simulated values for the observables at
each time step. A third optional matrix-pointer argument allows you to retrieve a (T × r ) matrix
holding the simulated state vector. Examples:

matrix Y = ksimul(V) # obsvar is null

Y = ksimul(V, W) # obsvar is non-null
matrix S
Y = ksimul(V, null, &S) # the simulated state is wanted

The initial value ξ 1 is calculated thus: we find the matrix T such that TT0 = P1|0 (as given by the
inivar element in the kalman block), multiply it into v1 , and add the result to ξ 1|0 (as given by
inistate).
If the disturbances are correlated across the two equations the arguments to ksimul must be
revised: the first argument should be a (T × p) matrix, each row of which represents ε 0t (see sec-
tion 28.2), and the second argument should be given as null.

28.9 Example 1: ARMA estimation

As is well known, the Kalman filter provides a very efficient way to compute the likelihood of ARMA
models; as an example, take an ARMA(1,1) model

yt = φyt−1 + εt + θεt−1
6 See I. Karibzhanov’s exposition at http://www.econ.umn.edu/~karib003/help/kalcvs.htm.
Chapter 28. The Kalman Filter 233

One of the ways the above equation can be cast in state-space form is by defining a latent process
ξt = (1 − φL)−1 εt . The observation equation corresponding to (28.2) is then

yt = ξt + θξt−1 (28.11)

and the state transition equation corresponding to (28.1) is

" # " #" # " #
ξt φ 0 ξt−1 εt
= +
ξt−1 1 0 ξt−2 0

The gretl syntax for a corresponding kalman block would be

matrix H = {1; theta}

matrix F = {phi, 0; 1, 0}
matrix Q = {s^2, 0; 0, 0}

kalman
obsy y
obsymat H
statemat F
statevar Q
end kalman

Note that the observation equation (28.11) does not include an “error term”; this is equivalent
to saying that V (wt ) = 0 and, as a consequence, the kalman block does not include an obsvar
keyword.
Once the filter is set up, all it takes to compute the log-likelihood for given values of φ, θ and
σ 2 is to execute the kfilter() function and use the $kalman_lnl accessor (which returns the
total log-likelihood) or, more appropriately if the likelihood has to be maximized through mle, the
$kalman_llt accessor, which returns the series of individual contribution to the log-likelihood for
each observation. An example is shown in script 28.1.

28.10 Example 2: local level model

Suppose we have a series yt = µt + εt , where µt is a random walk with normal increments of
variance σ12 and εt is a normal white noise with variance σ22 , independent of µt . This is known as
the “local level” model in Harvey’s (1989) terminology, and it can be cast in state-space form as
equations (28.1)-(28.2) with F = 1, vt ∼ N(0, σ12 ), H = 1 and wt ∼ N(0, σ22 ). The translation to a
kalman block is

kalman
obsy y
obsymat 1
statemat 1
statevar s2
obsvar s1
end kalman --diffuse

The two unknown parameters σ12 and σ22 can be estimated via maximum likelihood. Script 28.2
provides an example of simulation and estimation of such a model. For the sake of brevity, simu-
lation is carried out via ordinary gretl commands, rather than the state-space apparatus described
above.
The example contains two functions: the first one carries out the estimation of the unknown pa-
rameters σ12 and σ22 via maximum likelihood; the second one uses these estimates to compute a
smoothed estimate of the unobservable series µt calles muhat. A plot of µt and its estimate is
presented in Figure 28.1.
Chapter 28. The Kalman Filter 234

Example 28.1: ARMA estimation

function void arma11_via_kalman(series y)

/* parameter initalization */
phi = 0
theta = 0
sigma = 1

/* Kalman filter setup */

matrix H = {1; theta}
matrix F = {phi, 0; 1, 0}
matrix Q = {sigma^2, 0; 0, 0}

kalman
obsy y
obsymat H
statemat F
statevar Q
end kalman

/* maximum likelihood estimation */

mle logl = ERR ? NA : $kalman_llt
H[2] = theta
F[1,1] = phi
Q[1,1] = sigma^2
ERR = kfilter()
params phi theta sigma
end mle -h
end function

# ------------------------ main ---------------------------

open arma.gdt # open the "arma" example dataset

arma11_via_kalman(y) # estimate an arma(1,1) model
arma 1 1 ; y --nc # check via native command
Chapter 28. The Kalman Filter 235

Example 28.2: Local level model

function matrix local_level (series y)

/* starting values */
scalar s1 = 1
scalar s2 = 1

/* Kalman filter set-up */

kalman
obsy y
obsymat 1
statemat 1
statevar s2
obsvar s1
end kalman --diffuse

/* ML estimation */
mle ll = ERR ? NA : $kalman_llt
ERR = kfilter()
params s1 s2
end mle

return s1 ~ s2
end function

function series loclev_sm (series y, scalar s1, scalar s2)

/* return the smoothed estimate of \mu_t */
kalman
obsy y
obsymat 1
statemat 1
statevar s2
obsvar s1
end kalman --diffuse
series ret = ksmooth()
return ret
end function

/* -------------------- main script -------------------- */

nulldata 200
set seed 202020
setobs 1 1 --special
true_s1 = 0.25
true_s2 = 0.5
v = normal() * sqrt(true_s1)
w = normal() * sqrt(true_s2)
mu = 2 + cum(w)
y = mu + v

matrix Vars = local_level(y) # estimate the variances

muhat = loclev_sm(y, Vars[1], Vars[2]) # compute the smoothed state
Chapter 28. The Kalman Filter 236

10
mu
muhat
8

-2

-4

-6

-8
0 50 100 150 200

Figure 28.1: Local level model: µt and its smoothed estimate

By appending the following code snippet to the example in Table 28.2, one may check the results
against the R command StructTS.

foreign language=R --send-data

y <- gretldata[,"y"]
a <- StructTS(y, type="level")
a
StateFromR <- as.ts(tsSmooth(a))
gretl.export(StateFromR)
end foreign

append @dotdir/StateFromR.csv

ols muhat 0 StateFromR --simple

 Chapter 29

Numerical methods

Several functions are available to aid in the construction of special-purpose estimators: one group
of functions are used to maximize user-supplied functions via numerical methods: BFGS, Newton–
Raphson and Simulated Annealing. Another relevant function is fdjac, which produces a forward-
difference approximation to the Jacobian.

29.1 BFGS
The BFGSmax function has two required arguments: a vector holding the initial values of a set of
parameters, and a call to a function that calculates the (scalar) criterion to be maximized, given
the current parameter values and any other relevant data. If the object is in fact minimization, this
function should return the negative of the criterion. On successful completion, BFGSmax returns the
maximized value of the criterion and the matrix given via the first argument holds the parameter
values which produce the maximum. It is assumed here that the objective function is a user-defined
function (see Chapter 10) with the following general set-up:

function scalar ObjFunc (matrix *theta, matrix *X)

scalar val = ... # do some computation
return val
end function

The first argument contains the arguments upon which the maximization has to take place, while
the second argument may be used to hold “extra” values that are necessary to compute the objective
function, but are not the variables of the optimization problem. For example, if the objective
function were a loglikelihood, the first argument would contain the parameters and the second one
the data. Or, for more economic-theory inclined readers, if the objective function were the utility
of a consumer, the first argument would contain the quantities of goods and the second one their
prices and disposable income.

Example 29.1: Finding the minimum of the Rosenbrock function

function scalar Rosenbrock(matrix *param)

scalar x = param[1]
scalar y = param[2]
return -(1-x)^2 - 100 * (y - x^2)^2
end function

matrix theta = { 0, 0 }

set max_verbose 1
M = BFGSmax(theta, Rosenbrock(&theta))

print theta

237
Chapter 29. Numerical methods 238

The operation of BFGS can be adjusted using the set variables bfgs_maxiter and bfgs_toler
(see Chapter 19). In addition you can provoke verbose output from the maximizer by assigning a
positive value to max_verbose, again via the set command.
The Rosenbrock function is often used as a test problem for optimization algorithms. It is also
known as “Rosenbrock’s Valley” or “Rosenbrock’s Banana Function”, on account of the fact that its
contour lines are banana-shaped. It is defined by:

f (x, y) = (1 − x)2 + 100(y − x 2 )2

The function has a global minimum at (x, y) = (1, 1) where f (x, y) = 0. Example 29.1 shows a
gretl script that discovers the minimum using BFGSmax (giving a verbose account of progress). Note
that, in this particular case, the function to be maximized only depends on the parameters, so the
second parameter is omitted from the definition of the function Rosenbrock.

Limited-memory variant
See Byrd et al. (1995) (. . . FIXME: expand a little here . . . )

Supplying analytical derivatives for BFGS

An optional third argument to the BFGSmax function enables the user to supply analytical deriva-
tives of the criterion function with respect to the parameters (without which a numerical approxi-
mation to the gradient is computed). This argument is similar to the second one in that it specifies
a function call. In this case the function that is called must have the following signature.
Its first argument should be a pre-defined matrix correctly dimensioned to hold the gradient; that
is, if the parameter vector contains k elements, the gradient matrix must also be a k-vector. This
matrix argument must be given in “pointer” form so that its content can be modified by the func-
tion. (Note that unlike the parameter vector, where the choice of initial values can be important,
the initial values given to the gradient are immaterial and do not affect the results.)
In addition the gradient function must have as one of its argument the parameter vector. This may
be given in pointer form (which enhances efficiency) but that is not required. Additional arguments
may be specified if necessary.
Given the current parameter values, the function call must fill out the gradient vector appropriately.
It is not required that the gradient function returns any value directly; if it does, that value is
ignored.
Example 29.2 illustrates, showing how the Rosenbrock script can be modified to use analytical
derivatives. (Note that since this is a minimization problem the values written into g[1] and g[2]
in the function Rosen_grad are in fact the derivatives of the negative of the Rosenbrock function.)

29.2 Newton–Raphson
BFGS, discussed above, is an excellent all-purpose maximizer, and about as robust as possible given
the limitations of digital computer arithmetic. The Newton–Raphson maximizer is not as robust,
but may converge much faster than BFGS for problems where the maximand is reasonably well
behaved — in particular, where it is anything like quadratic (see below). The case for using Newton–
Raphson is enhanced if it is possible to supply a function to calculate the Hessian analytically.
The gretl function NRmax, which implements the Newton–Raphson method, has a maximum of
four arguments. The first two (required) arguments are exactly as for BFGS: an initial parameter
vector, and a function call which returns the maximand given the parameters. The (optional) third
argument is again as in BFGS: a function call that calculates the gradient. Specific to NRmax is
an optional fourth argument, namely a function call to calculate the (negative) Hessian. The first
argument of this function must be a pre-defined matrix of the right dimension to hold the Hessian
— that is, a k × k matrix, where k is the length of the parameter vector — given in “pointer” form.
Chapter 29. Numerical methods 239

Example 29.2: Rosenbrock function with analytical gradient

function scalar Rosenbrock (matrix *param)

scalar x = param[1]
scalar y = param[2]
return -(1-x)^2 - 100 * (y - x^2)^2
end function

function void Rosen_grad (matrix *g, matrix *param)

scalar x = param[1]
scalar y = param[2]
g[1] = 2*(1-x) + 2*x*(200*(y-x^2))
g[2] = -200*(y - x^2)
end function

matrix theta = { 0, 0 }
matrix grad = { 0, 0 }

set max_verbose 1
M = BFGSmax(theta, Rosenbrock(&theta), Rosen_grad(&grad, &theta))

print theta
print grad

The second argument should be the parameter vector (optionally in pointer form). Other data may
be passed as additional arguments as needed. Similarly to the case with the gradient, if the fourth
argument to NRmax is omitted then a numerical approximation to the Hessian is constructed.
What is ultimately required in Newton–Raphson is the negative inverse of the Hessian. Note that
if you give the optional fourth argument, your function should compute the negative Hessian, but
should not invert it; NRmax takes care of inversion, with special handling for the case where the
matrix is not negative definite, which can happen far from the maximum.
Script 29.3 extends the Rosenbrock example, using NRmax with a function Rosen_hess to compute
the Hessian. The functions Rosenbrock and Rosen_grad are just the same as in Example 29.2 and
are omitted for brevity.
The idea behind Newton–Raphson is to exploit a quadratic approximation to the maximand, under
the assumption that it is concave. If this is true, the method is very effective. However, if the
algorithm happens to evaluate the function at a point where the Hessian is not negative definite,
things may go wrong. Script 29.4 exemplifies this by using a normal density, which is concave in the
interval (−1, 1) and convex elsewhere. If the algorithm is started from within the interval everything
goes well and NR is (slightly) more effective than BFGS. If, however, the Hessian is positive at the
starting point BFGS converges with only little more difficulty, while Newton–Raphson fails.

29.3 Simulated Annealing

Simulated annealing — as implemented by the gretl function simann — is not a full-blown maxi-
mization method in its own right, but can be a useful auxiliary tool in problems where convergence
depends sensitively on the initial values of the parameters. The idea is that you supply initial values
and the simulated annealing mechanism tries to improve on them via controlled randomization.
The simann function takes up to three arguments. The first two (required) are the same as for
BFGSmax and NRmax: an initial parameter vector and a function that computes the maximand. The
Chapter 29. Numerical methods 240

Example 29.3: Rosenbrock function via Newton–Raphson

function void Rosen_hess (matrix *H, matrix *param)

scalar x = param[1]
scalar y = param[2]
H[1,1] = 2 - 400*y + 1200*x^2
H[1,2] = -400*x
H[2,1] = -400*x
H[2,2] = 200
end function

matrix theta = { 0, 0 }
matrix g = { 0, 0 }
matrix H = zeros(2, 2)

set max_verbose 1
M = NRmax(theta, Rosenbrock(&theta), Rosen_grad(&g, &theta),
Rosen_hess(&H, &theta))

print theta
print grad

Example 29.4: Maximization of a Gaussian density

function scalar ND(matrix x)

scalar z = x[1]
return exp(-0.5*z*z)
end function

set max_verbose 1

x = {0.75}
A = BFGSmax(x, ND(x))

x = {0.75}
A = NRmax(x, ND(x))

x = {1.5}
A = BFGSmax(x, ND(x))

x = {1.5}
A = NRmax(x, ND(x))
Chapter 29. Numerical methods 241

optional third argument is a positive integer giving the maximum number of iterations, n, which
defaults to 1024.
Starting from the specified point in the parameter space, for each of n iterations we select at
random a new point within a certain radius of the previous one and determine the value of the
criterion at the new point. If the criterion is higher we jump to the new point; otherwise, we jump
with probability P (and remain at the previous point with probability 1 − P ). As the iterations
proceed, the system gradually “cools” — that is, the radius of the random perturbation is reduced,
as is the probability of making a jump when the criterion fails to increase.
In the course of this procedure n + 1 points in the parameter space are evaluated: call them θi , i =
0, . . . , n, where θ0 is the initial value given by the user. Let θ ∗ denote the “best” point among
θ1 , . . . , θn (highest criterion value). The value written into the parameter vector on completion is
then θ ∗ if θ ∗ is better than θ0 , otherwise θn . In other words, failing an actual improvement in
the criterion, simann randomizes the starting point, which may be helpful in tricky optimization
problems.
Example 29.5 shows simann at work as a helper for BFGSmax in finding the maximum of a bimodal
function. Unaided, BFGSmax requires 60 function evaluations and 55 evaluations of the gradient,
while after simulated annealing the maximum is found with 7 function evaluations and 6 evalua-
tions of the gradient.1

Example 29.5: BFGS with initialization via Simulated Annealing

function scalar bimodal (matrix x, matrix A)

scalar ret = exp(-qform((x-1)’, A))
ret += 2*exp(-qform((x+4)’, A))
return ret
end function

set seed 12334

set max_verbose on

scalar k = 2
matrix A = 0.1 * I(k)
matrix x0 = {3; -5}

x = x0
u = BFGSmax(x, bimodal(x, A))
print x

x = x0
u = simann(x, bimodal(x, A), 1000)
print x
u = BFGSmax(x, bimodal(x, A))
print x

29.4 Computing a Jacobian

Gretl offers the possibility of differentiating numerically a user-defined function via the fdjac
function.
This function takes two arguments: an n × 1 matrix holding initial parameter values and a function
1 Your mileage may vary: these figures are somewhat compiler- and machine-dependent.
Chapter 29. Numerical methods 242

call that calculates and returns an m × 1 matrix, given the current parameter values and any other
relevant data. On successful completion it returns an m × n matrix holding the Jacobian. For
example,

matrix Jac = fdjac(theta, SumOC(&theta, &X))

where we assume that SumOC is a user-defined function with the following structure:

function matrix SumOC (matrix *theta, matrix *X)

matrix V = ... # do some computation
return V
end function

This may come in handy in several cases: for example, if you use BFGSmax to estimate a model, you
may wish to calculate a numerical approximation to the relevant Jacobian to construct a covariance
matrix for your estimates.
Another example is the delta method: if you have a consistent estimator of a vector of parameters
θ̂, and a consistent estimate of its covariance matrix Σ, you may need to compute estimates for a
nonlinear continuous transformation ψ = g(θ). In this case, a standard result in asymptotic theory
is that
p
 ψ̂ = g(θ̂) −p→ ψ = g(θ) 
   
 θ̂ −→ θ 
=⇒
 √T θ̂ − θ −d→ N(0, Σ)   √T ψ̂ − ψ
−d→ N(0, JΣJ 0 ) 
 


∂g(x) 
where T is the sample size and J is the Jacobian ∂x
 .
x=θ
Script 29.6 exemplifies such a case: the example is taken from Greene (2003), section 9.3.1. The
slight differences between the results reported in the original source and what gretl returns are due
to the fact that the Jacobian is computed numerically, rather than analytically as in the book.
On the subject of numerical versus analytical derivatives, one may wonder what difference it makes
to use one method or another. Simply put, the answer is: analytical derivatives may be painful to
derive and to translate into code, but in most cases they are much faster than using fdjac; as a
consequence, if you need to use derivatives as part of an algorithm that requires iteration (such
as numerical optimization, or a Monte Carlo experiment), you’ll definitely want to use analytical
derivatives.
Analytical derivatives are also, in most cases, more precise than numerical ones, but this advantage
may or may not be negligible in practice depending on the practical details: the two fundamental
aspects to take in consideration are nonlinearity and machine precision.
As an example, consider the derivative of a highly nonlinear function such as the matrix inverse. In
order to keep the example simple, let’s focus on 2 × 2 matrices and define the function

function matrix vecinv(matrix x)

A = mshape(x,2,2)
return vec(inv(A))’
end function

which, given vec(A), returns vec(A−1 ). As is well known (see for example Magnus and Neudecker
(1988)),
∂vec(A−1 )
= −(A−1 )0 ⊗ (A−1 ),
∂vec(A)
which is rather easy to code in hansl as

function matrix grad(matrix x)

iA = inv(mshape(x,2,2))
return -iA’ ** iA
end function
Chapter 29. Numerical methods 243

Example 29.6: Delta Method

function matrix MPC(matrix *param, matrix *Y)

beta = param[2]
gamma = param[3]
y = Y[1]
return beta*gamma*y^(gamma-1)
end function

# William Greene, Econometric Analysis, 5e, Chapter 9

set echo off
set messages off
open greene5_1.gdt

# Use OLS to initialize the parameters

ols realcons 0 realdpi --quiet
genr a = $coeff(0)
genr b = $coeff(realdpi)
genr g = 1.0

# Run NLS with analytical derivatives

nls realcons = a + b * (realdpi^g)
deriv a = 1
deriv b = realdpi^g
deriv g = b * realdpi^g * log(realdpi)
end nls

matrix Y = realdpi[2000:4]
matrix theta = $coeff
matrix V = $vcv

mpc = MPC(&theta, &Y)

matrix Jac = fdjac(theta, MPC(&theta, &Y))
Sigma = qform(Jac, V)

printf "\nmpc = %g, std.err = %g\n", mpc, sqrt(Sigma)

scalar teststat = (mpc-1)/sqrt(Sigma)
printf "\nTest for MPC = 1: %g (p-value = %g)\n", \
teststat, pvalue(n,abs(teststat))
Chapter 29. Numerical methods 244

Using the fdjac function to obtain the same result is even easier: you just invoke it like

fdjac(a, "vecinv(a)")

In order to see what the "difference

# is, in terms of precision, between analytical and numerical
2 1
Jacobians, start from A = ; the following code
1 1

a = {2; 1; 1; 1}
ia = vecinv(a)
ag = grad(a)
ng = fdjac(a, "vecinv(a)")
dg = ag - ng
print ag ng dg

gives

ag (4 x 4)

-1 1 1 -1
1 -2 -1 2
1 -1 -2 2
-1 2 2 -4

ng (4 x 4)

-1 1 1 -1
1 -2 -1 2
1 -1 -2 2
-1 2 2 -4

dg (4 x 4)

-3.3530e-08 -3.7251e-08 -3.7251e-08 -3.7255e-08

2.6079e-08 5.2150e-08 3.7251e-08 6.7060e-08
2.6079e-08 3.7251e-08 5.2150e-08 6.7060e-08
-2.2354e-08 -5.9600e-08 -5.9600e-08 -1.4902e-07

in which the analytically-computed

" derivative and
# its numerical approximation are essentially the
1.0001 1
same. If, however, you set A = you end up evaluating the function at a point in
1 1
which the function itself is considerably more nonlinear since the matrix is much closer to being
singular. As a consequence, the numerical approximation becomes much less satisfactory:

ag (4 x 4)

-1.0000e+08 1.0000e+08 1.0000e+08 -1.0000e+08

1.0000e+08 -1.0001e+08 -1.0000e+08 1.0001e+08
1.0000e+08 -1.0000e+08 -1.0001e+08 1.0001e+08
-1.0000e+08 1.0001e+08 1.0001e+08 -1.0002e+08

ng (4 x 4)

-9.9985e+07 1.0001e+08 1.0001e+08 -9.9985e+07

9.9985e+07 -1.0002e+08 -1.0001e+08 9.9995e+07
9.9985e+07 -1.0001e+08 -1.0002e+08 9.9995e+07
-9.9985e+07 1.0002e+08 1.0002e+08 -1.0001e+08
Chapter 29. Numerical methods 245

dg (4 x 4)

-14899. -14901. -14901. -14900.

14899. 14903. 14901. 14902.
14899. 14901. 14903. 14902.
-14899. -14903. -14903. -14903.
" #
2 1
Moreover, machine precision may have its impact: if you take A = 0.00001 × , the matrix
1 1
itself is not singular at all, but the order of magnitude of its elements is close enough to machine
precision to provoke problems:

ag (4 x 4)

-1.0000e+10 1.0000e+10 1.0000e+10 -1.0000e+10

1.0000e+10 -2.0000e+10 -1.0000e+10 2.0000e+10
1.0000e+10 -1.0000e+10 -2.0000e+10 2.0000e+10
-1.0000e+10 2.0000e+10 2.0000e+10 -4.0000e+10

ng (4 x 4)

-1.0000e+10 1.0000e+10 1.0000e+10 -1.0000e+10

1.0000e+10 -2.0000e+10 -1.0000e+10 2.0000e+10
1.0000e+10 -1.0000e+10 -2.0000e+10 2.0000e+10
-1.0000e+10 2.0000e+10 2.0000e+10 -4.0000e+10

dg (4 x 4)

-488.30 -390.60 -390.60 -195.33

634.79 781.21 390.60 585.98
634.79 488.26 683.55 585.98
-781.27 -976.52 -781.21 -1367.3
 Chapter 30

Discrete and censored dependent variables

This chapter deals with models for dependent variables that are discrete or censored or otherwise
limited (as in event counts or durations, which must be positive) and that therefore call for estima-
tion methods other than the classical linear model. We discuss several estimators (mostly based on
the Maximum Likelihood principle), adding some details and examples to complement the material
on these methods in the Gretl Command Reference.

30.1 Logit and probit models

It often happens that one wants to specify and estimate a model in which the dependent variable
is not continuous, but discrete. A typical example is a model in which the dependent variable is
the occupational status of an individual (1 = employed, 0 = unemployed). A convenient way of
formalizing this situation is to consider the variable yi as a Bernoulli random variable and analyze
its distribution conditional on the explanatory variables xi . That is,
(
1 Pi
yi = (30.1)
0 1 − Pi

where Pi = P (yi = 1|xi ) is a given function of the explanatory variables xi .

In most cases, the function Pi is a cumulative distribution function F , applied to a linear combi-
nation of the xi s. In the probit model, the normal cdf is used, while the logit model employs the
logistic function Λ(). Therefore, we have

probit Pi = F (zi ) = Φ(zi ) (30.2)

1
logit Pi = F (zi ) = Λ(zi ) = (30.3)
1 + e−zi
Xk
zi = xij βj (30.4)
j=1

where zi is commonly known as the index function. Note that in this case the coefficients βj cannot
be interpreted as the partial derivatives of E(yi |xi ) with respect to xij . However, for a given value
of xi it is possible to compute the vector of “slopes”, that is

∂F (z) 
slopej (x̄) =


∂xj z=z̄

Gretl automatically computes the slopes, setting each explanatory variable at its sample mean.
Another, equivalent way of thinking about this model is in terms of an unobserved variable yi∗
which can be described thus:
k
X
yi∗ = xij βj + εi = zi + εi (30.5)
j=1

We observe yi = 1 whenever yi∗

> 0 and yi = 0 otherwise. If εi is assumed to be normal, then we
have the probit model. The logit model arises if we assume that the density function of εi is
∂Λ(εi ) e−εi
λ(εi ) = =
∂εi (1 + e−εi )2

246
Chapter 30. Discrete and censored dependent variables 247

Both the probit and logit model are estimated in gretl via maximum likelihood, where the log-
likelihood can be written as
X X
L(β) = ln[1 − F (zi )] + ln F (zi ), (30.6)
yi =0 yi =1

which is always negative, since 0 < F (·) < 1. Since the score equations do not have a closed form
solution, numerical optimization is used. However, in most cases this is totally transparent to the
user, since usually only a few iterations are needed to ensure convergence. The --verbose switch
can be used to track the maximization algorithm.

Example 30.1: Estimation of simple logit and probit models

open greene19_1

logit GRADE const GPA TUCE PSI

probit GRADE const GPA TUCE PSI

As an example, we reproduce the results given in chapter 21 of Greene (2000), where the effective-
ness of a program for teaching economics is evaluated by the improvements of students’ grades.
Running the code in example 30.1 gives the output reported in Table 30.1; note that, for the probit
model, a conditional moment test on skewness and kurtosis is printed out automatically as a test
for normality.
In this context, the $uhat accessor function takes a special meaning: it returns generalized resid-
uals as defined in Gourieroux, Monfort, Renault and Trognon (1987), which can be interpreted as
unbiased estimators of the latent disturbances εi . These are defined as

 yi − P̂i for the logit model
ui = (30.7)
 yi · φ(ẑi ) − (1 − yi ) · φ(ẑi ) for the probit model
Φ(ẑi ) 1−Φ(ẑi )

Among other uses, generalized residuals are often used for diagnostic purposes. For example, it is
very easy to set up an omitted variables test equivalent to the familiar LM test in the context of a
linear regression; example 30.2 shows how to perform a variable addition test.

Example 30.2: Variable addition test in a probit model

open greene19_1

probit GRADE const GPA PSI

series u = $uhat
%$
ols u const GPA PSI TUCE -q
printf "Variable addition test for TUCE:\n"
printf "Rsq * T = %g (p. val. = %g)\n", $trsq, pvalue(X,1,$trsq)

The perfect prediction problem

One curious characteristic of logit and probit models is that (quite paradoxically) estimation is not
feasible if a model fits the data perfectly; this is called the perfect prediction problem. The reason
Chapter 30. Discrete and censored dependent variables 248

Model 1: Logit estimates using the 32 observations 1-32

Dependent variable: GRADE

VARIABLE COEFFICIENT STDERROR T STAT SLOPE

(at mean)
const -13.0213 4.93132 -2.641
GPA 2.82611 1.26294 2.238 0.533859
TUCE 0.0951577 0.141554 0.672 0.0179755
PSI 2.37869 1.06456 2.234 0.449339

Mean of GRADE = 0.344

Number of cases ’correctly predicted’ = 26 (81.2%)
f(beta’x) at mean of independent vars = 0.189
McFadden’s pseudo-R-squared = 0.374038
Log-likelihood = -12.8896
Likelihood ratio test: Chi-square(3) = 15.4042 (p-value 0.001502)
Akaike information criterion (AIC) = 33.7793
Schwarz Bayesian criterion (BIC) = 39.6422
Hannan-Quinn criterion (HQC) = 35.7227

Predicted
0 1
Actual 0 18 3
1 3 8

Model 2: Probit estimates using the 32 observations 1-32

Dependent variable: GRADE

VARIABLE COEFFICIENT STDERROR T STAT SLOPE

(at mean)
const -7.45232 2.54247 -2.931
GPA 1.62581 0.693883 2.343 0.533347
TUCE 0.0517288 0.0838903 0.617 0.0169697
PSI 1.42633 0.595038 2.397 0.467908

Mean of GRADE = 0.344

Number of cases ’correctly predicted’ = 26 (81.2%)
f(beta’x) at mean of independent vars = 0.328
McFadden’s pseudo-R-squared = 0.377478
Log-likelihood = -12.8188
Likelihood ratio test: Chi-square(3) = 15.5459 (p-value 0.001405)
Akaike information criterion (AIC) = 33.6376
Schwarz Bayesian criterion (BIC) = 39.5006
Hannan-Quinn criterion (HQC) = 35.581

Predicted
0 1
Actual 0 18 3
1 3 8

Test for normality of residual -

Null hypothesis: error is normally distributed
Test statistic: Chi-square(2) = 3.61059
with p-value = 0.164426

Table 30.1: Example logit and probit

Chapter 30. Discrete and censored dependent variables 249

why this problem arises is easy to see by considering equation (30.6): if for some vector β and scalar
k it’s the case that zi < k whenever yi = 0 and zi > k whenever yi = 1, the same thing is true
for any multiple of β. Hence, L(β) can be made arbitrarily close to 0 simply by choosing enormous
values for β. As a consequence, the log-likelihood has no maximum, despite being bounded.
Gretl has a mechanism for preventing the algorithm from iterating endlessly in search of a non-
existent maximum. One sub-case of interest is when the perfect prediction problem arises because
of a single binary explanatory variable. In this case, the offending variable is dropped from the
model and estimation proceeds with the reduced specification. Nevertheless, it may happen that
no single “perfect classifier” exists among the regressors, in which case estimation is simply impos-
sible and the algorithm stops with an error. This behavior is triggered during the iteration process
if
max zi < min zi
i:yi =0 i:yi =1

If this happens, unless your model is trivially mis-specified (like predicting if a country is an oil
exporter on the basis of oil revenues), it is normally a small-sample problem: you probably just
don’t have enough data to estimate your model. You may want to drop some of your explanatory
variables.
This problem is well analyzed in Stokes (2004); the results therein are replicated in the example
script murder_rates.inp.

30.2 Ordered response models

These models constitute a simple variation on ordinary logit/probit models, and are usually applied
when the dependent variable is a discrete and ordered measurement — not simply binary, but on
an ordinal rather than an interval scale. For example, this sort of model may be applied when the
dependent variable is a qualitative assessment such as “Good”, “Average” and “Bad”.
In the general case, consider an ordered response variable, y, that can take on any of the J+1 values
0, 1, 2, . . . , J. We suppose, as before, that underlying the observed response is a latent variable,

y ∗ = Xβ + ε = z + ε

Now define “cut points”, α1 < α2 < · · · < αJ , such that

y =0 if y ∗ ≤ α1
y =1 if α1 < y ∗ ≤ α2
..
.
y =J if y ∗ > αJ

For example, if the response takes on three values there will be two such cut points, α1 and α2 .
The probability that individual i exhibits response j, conditional on the characteristics xi , is then
given by

∗
 P (y ≤ α1 | xi ) = F (α1 − zi ) for j = 0


P (yi = j | xi ) = P (αj < y ∗ ≤ αj+1 | xi ) = F (αj+1 − zi ) − F (αj − zi ) for 0 < j < J (30.8)

 P (y ∗ > α | x ) = 1 − F (α − z )

for j = J
J i J i

The unknown parameters αj are estimated jointly with the βs via maximum likelihood. The α̂j
estimates are reported by gretl as cut1, cut2 and so on. For the probit variant, a conditional
moment test for normality constructed in the spirit of Chesher and Irish (1987) is also included.
Note that the αj parameters can be shifted arbitrarily by adding a constant to zi , so the model is
under-identified if there is some linear combination of the explanatory variables which is constant.
The most obvious case in which this occurs is when the model contains a constant term; for this
Chapter 30. Discrete and censored dependent variables 250

reason, gretl drops automatically the intercept if present. However, it may happen that the user
inadventently specifies a list of regressors that may be combined in such a way to produce a con-
stant (for example, by using a full set of dummy variables for a discrete factor). If this happens,
gretl will also drop any offending regressors.
In order to apply these models in gretl, the dependent variable must either take on only non-
negative integer values, or be explicitly marked as discrete. (In case the variable has non-integer
values, it will be recoded internally.) Note that gretl does not provide a separate command for
ordered models: the logit and probit commands automatically estimate the ordered version if
the dependent variable is acceptable, but not binary.
Example 30.3 reproduces the results presented in section 15.10 of Wooldridge (2002a). The ques-
tion of interest in this analysis is what difference it makes, to the allocation of assets in pension
funds, whether individual plan participants have a choice in the matter. The response variable is
an ordinal measure of the weight of stocks in the pension portfolio. Having reported the results
of estimation of the ordered model, Wooldridge illustrates the effect of the choice variable by ref-
erence to an “average” participant. The example script shows how one can compute this effect in
gretl.
After estimating ordered models, the $uhat accessor yields generalized residuals as in binary mod-
els; additionally, the $yhat accessor function returns ẑi , so it is possible to compute an unbiased
estimator of the latent variable yi∗ simply by adding the two together.

30.3 Multinomial logit

When the dependent variable is not binary and does not have a natural ordering, multinomial
models are used. Multinomial logit is supported in gretl via the --multinomial option to the
logit command. Simple models can also be handled via the mle command (see chapter 19). We
give here an example of such a model. Let the dependent variable, yi , take on integer values
0, 1, . . . p. The probability that yi = k is given by

exp(xi βk )
P (yi = k|xi ) = Pp
j=0 exp(xi βj )

For the purpose of identification one of the outcomes must be taken as the “baseline”; it is usually
assumed that β0 = 0, in which case

exp(xi βk )
P (yi = k|xi ) = Pp
1+ j=1 exp(xi βj )

and
1
P (yi = 0|xi ) = Pp .
1+ j=1 exp(xi βj )

Example 30.4 reproduces Table 15.2 in Wooldridge (2002a), based on data on career choice from
Keane and Wolpin (1997). The dependent variable is the occupational status of an individual (0 = in
school; 1 = not in school and not working; 2 = working), and the explanatory variables are education
and work experience (linear and square) plus a “black” binary variable. The full data set is a panel;
here the analysis is confined to a cross-section for 1987.
Chapter 30. Discrete and censored dependent variables 251

Example 30.3: Ordered probit model

/*
Replicate the results in Wooldridge, Econometric Analysis of Cross
Section and Panel Data, section 15.10, using pension-plan data from
Papke (AER, 1998).

The dependent variable, pctstck (percent stocks), codes the asset

allocation responses of "mostly bonds", "mixed" and "mostly stocks"
as {0, 50, 100}.

The independent variable of interest is "choice", a dummy indicating

whether individuals are able to choose their own asset allocations.
*/

open pension.gdt

# demographic characteristics of participant

list DEMOG = age educ female black married
# dummies coding for income level
list INCOME = finc25 finc35 finc50 finc75 finc100 finc101

# Papke’s OLS approach

ols pctstck const choice DEMOG INCOME wealth89 prftshr
# save the OLS choice coefficient
choice_ols = $coeff(choice)

# estimate ordered probit

probit pctstck choice DEMOG INCOME wealth89 prftshr

k = $ncoeff
matrix b = $coeff[1:k-2]
a1 = $coeff[k-1]
a2 = $coeff[k]

/*
Wooldridge illustrates the ’choice’ effect in the ordered probit
by reference to a single, non-black male aged 60, with 13.5 years
of education, income in the range $50K - $75K and wealth of $200K,
participating in a plan with profit sharing.
*/
matrix X = {60, 13.5, 0, 0, 0, 0, 0, 0, 1, 0, 0, 200, 1}

# with ’choice’ = 0
scalar Xb = (0 ~ X) * b
P0 = cdf(N, a1 - Xb)
P50 = cdf(N, a2 - Xb) - P0
P100 = 1 - cdf(N, a2 - Xb)
E0 = 50 * P50 + 100 * P100

# with ’choice’ = 1
Xb = (1 ~ X) * b
P0 = cdf(N, a1 - Xb)
P50 = cdf(N, a2 - Xb) - P0
P100 = 1 - cdf(N, a2 - Xb)
E1 = 50 * P50 + 100 * P100

printf "\nWith choice, E(y) = %.2f, without E(y) = %.2f\n", E1, E0

printf "Estimated choice effect via ML = %.2f (OLS = %.2f)\n", E1 - E0,
choice_ols
Chapter 30. Discrete and censored dependent variables 252

Example 30.4: Multinomial logit

Input:
open keane.gdt
smpl (year=87) --restrict
logit status 0 educ exper expersq black --multinomial

Output (selected portions):

Model 1: Multinomial Logit, using observations 1-1738 (n = 1717)
Missing or incomplete observations dropped: 21
Dependent variable: status
Standard errors based on Hessian

coefficient std. error z p-value

--------------------------------------------------------
status = 2
const 10.2779 1.13334 9.069 1.20e-19 ***
educ -0.673631 0.0698999 -9.637 5.57e-22 ***
exper -0.106215 0.173282 -0.6130 0.5399
expersq -0.0125152 0.0252291 -0.4961 0.6199
black 0.813017 0.302723 2.686 0.0072 ***
status = 3
const 5.54380 1.08641 5.103 3.35e-07 ***
educ -0.314657 0.0651096 -4.833 1.35e-06 ***
exper 0.848737 0.156986 5.406 6.43e-08 ***
expersq -0.0773003 0.0229217 -3.372 0.0007 ***
black 0.311361 0.281534 1.106 0.2687

Mean dependent var 2.691322 S.D. dependent var 0.573502

Log-likelihood -907.8572 Akaike criterion 1835.714
Schwarz criterion 1890.198 Hannan-Quinn 1855.874

Number of cases ’correctly predicted’ = 1366 (79.6%)

Likelihood ratio test: Chi-square(8) = 583.722 [0.0000]
Chapter 30. Discrete and censored dependent variables 253

30.4 Bivariate probit

The bivariate probit model is simply a two-equation system in which each equation is a probit
model, but the two disturbance terms may not be independent. In formulae,
k1
X
∗ ∗
y1,i = xij βj + ε1,i y1,i = 1 ⇐⇒ y1,i >0 (30.9)
j=1
k2
X
∗ ∗
y2,i = zij γj + ε2,i y2,i = 1 ⇐⇒ y2,i >0 (30.10)
j=1
" # " !#
ε2,i 1 ρ
∼ N 0, (30.11)
ε2,i ρ 1

• The explanatory variables for the first equation x and for the second equation z may overlap
• example contained in biprobit.inp
• $uhat and $yhat are matrices

FIXME: expand.

30.5 The Tobit model

The Tobit model is used when the dependent variable of a model is censored. Assume a latent
variable yi∗ can be described as
k
X
∗
yi = xij βj + εi ,
j=1

where εi ∼ N(0, σ 2 ). If yi∗

were observable, the model’s parameters could be estimated via ordinary
least squares. On the contrary, suppose that we observe yi , defined as

 a

 for yi∗ ≤ a
yi = yi∗ for a < yi∗ < b (30.12)

 b ∗
for y ≥ b

i

In most cases found in the applied literature, a = 0 and b = ∞, so in practice negative values of yi∗
are not observed and are replaced by zeros.
In this case, regressing yi on the xi s does not yield consistent estimates of the parameters β,
Pk
because the conditional mean E(yi |xi ) is not equal to j=1 xij βj . It can be shown that restricting
the sample to non-zero observations would not yield consistent estimates either. The solution is to
estimate the parameters via maximum likelihood. The syntax is simply

tobit depvar indvars

As usual, progress of the maximization algorithm can be tracked via the --verbose switch, while
$uhat returns the generalized residuals. Note that in this case the generalized residual is defined
as ûi = E(εi |yi = 0) for censored observations, so the familiar equality ûi = yi − ŷi only holds for
uncensored observations, that is, when yi > 0.
An important difference between the Tobit estimator and OLS is that the consequences of non-
normality of the disturbance term are much more severe: non-normality implies inconsistency for
the Tobit estimator. For this reason, the output for the Tobit model includes the Chesher and Irish
(1987) normality test by default.
The general case in which a is nonzero and/or b is finite can be handled by using the options
--llimit and --rlimit. So, for example,
Chapter 30. Discrete and censored dependent variables 254

tobit depvar indvars --llimit=10

would tell gretl that the left bound a is set to 10.

30.6 Interval regression

The interval regression model arises when the dependent variable is unobserved for some (possibly
all) observations; what we observe instead is an interval in which the dependent variable lies. In
other words, the data generating process is assumed to be

yi∗ = xi β + i

but we only know that mi ≤ yi∗ ≤ Mi , where the interval may be left- or right-unbounded (but
not both). If mi = Mi , we effectively observe yi∗ and no information loss occurs. In practice, each
observation belongs to one of four categories:

1. left-unbounded, when mi = −∞,

2. right-unbounded, when Mi = ∞,

3. bounded, when −∞ < mi < Mi < ∞ and

4. point observations when mi = Mi .

It is interesting to note that this model bears similarities to other models in several special cases:

• When all observations are point observations the model trivially reduces to the ordinary linear
regression model.

• The interval model could be thought of an ordered probit model (see 30.2) in which the cut
points (the αj coefficients in eq. 30.8) are observed and don’t need to be estimated.

• The Tobit model (see 30.5) is a special case of the interval model in which mi and Mi do not
depend on i, that is, the censoring limits are the same for all observations. As a matter of
fact, gretl’s tobit commands is handled internally as a special case of the interval model.

The gretl command intreg estimates interval models by maximum likelihood, assuming normality
of the disturbance term i . Its syntax is

intreg minvar maxvar X

where minvar contains the mi series, with NAs for left-unbounded observations, and maxvar con-
tains Mi , with NAs for right-unbounded observations. By default, standard errors are computed
using the negative inverse of the Hessian. If the --robust flag is given, then QML or Huber–White
standard errors are calculated instead. In this case the estimated covariance matrix is a “sandwich”
of the inverse of the estimated Hessian and the outer product of the gradient.
If the model specification contains regressors other than just a constant, the output includes a
chi-square statistic for testing the joint null hypothesis that none of these regressors has any
effect on the outcome. This is a Wald statistic based on the estimated covariance matrix. If you
wish to construct a likelihood ratio test, this is easily done by estimating both the full model
and the null model (containing only the constant), saving the log-likelihood in both cases via the
$lnl accessor, and then referring twice the difference between the two log-likelihoods to the chi-
square distribution with k degrees of freedom, where k is the number of additional regressors (see
the pvalue command in the Gretl Command Reference). Also included is a conditional moment
normality test, similar to those provided for the probit, ordered probit and Tobit models (see
above). An example is contained in the sample script wtp.inp, provided with the gretl distribution.
Chapter 30. Discrete and censored dependent variables 255

Example 30.5: Interval model on artificial data

Input:

nulldata 100
# generate artificial data
set seed 201449
x = normal()
epsilon = 0.2*normal()
ystar = 1 + x + epsilon
lo_bound = floor(ystar)
hi_bound = ceil(ystar)

# run the interval model

intreg lo_bound hi_bound const x

# estimate ystar
gen_resid = $uhat
yhat = $yhat + gen_resid
corr ystar yhat

Output (selected portions):

Model 1: Interval estimates using the 100 observations 1-100
Lower limit: lo_bound, Upper limit: hi_bound

coefficient std. error t-ratio p-value

---------------------------------------------------------
const 0.993762 0.0338325 29.37 1.22e-189 ***
x 0.986662 0.0319959 30.84 8.34e-209 ***

Chi-square(1) 950.9270 p-value 8.3e-209

Log-likelihood -44.21258 Akaike criterion 94.42517
Schwarz criterion 102.2407 Hannan-Quinn 97.58824

sigma = 0.223273
Left-unbounded observations: 0
Right-unbounded observations: 0
Bounded observations: 100
Point observations: 0

...

corr(ystar, yhat) = 0.98960092

Under the null hypothesis of no correlation:
t(98) = 68.1071, with two-tailed p-value 0.0000

As with the probit and Tobit models, after a model has been estimated the $uhat accessor returns
the generalized residual, which is an estimate of i : more precisely, it equals yi − xi β̂ for point
observations and E(i |mi , Mi , xi ) otherwise. Note that it is possible to compute an unbiased pre-
dictor of yi∗ by summing this estimate to xi β̂. Script 30.5 shows an example. As a further similarity
with Tobit, the interval regression model may deliver inconsistent estimates if the disturbances are
non-normal; hence, the Chesher and Irish (1987) test for normality is included by default here too.
Chapter 30. Discrete and censored dependent variables 256

30.7 Sample selection model

In the sample selection model (also known as “Tobit II” model), there are two latent variables:
k
X
yi∗ = xij βj + εi (30.13)
j=1
p
X
si∗ = zij γj + ηi (30.14)
j=1

and the observation rule is given by

yi∗ for si∗ > 0

(
yi = (30.15)
♦ for si∗ ≤ 0

In this context, the ♦ symbol indicates that for some observations we simply do not have data on
y: yi may be 0, or missing, or anything else. A dummy variable di is normally used to set censored
observations apart.
One of the most popular applications of this model in econometrics is a wage equation coupled
with a labor force participation equation: we only observe the wage for the employed. If yi∗ and si∗
were (conditionally) independent, there would be no reason not to use OLS for estimating equation
(30.13); otherwise, OLS does not yield consistent estimates of the parameters βj .
Since conditional independence between yi∗ and si∗ is equivalent to conditional independence be-
tween εi and ηi , one may model the co-dependence between εi and ηi as
εi = ληi + vi ;
substituting the above expression in (30.13), you obtain the model that is actually estimated:
k
X
yi = xij βj + λη̂i + vi ,
j=1

so the hypothesis that censoring does not matter is equivalent to the hypothesis H0 : λ = 0, which
can be easily tested.
The parameters can be estimated via maximum likelihood under the assumption of joint normality
of εi and ηi ; however, a widely used alternative method yields the so-called Heckit estimator, named
after Heckman (1979). The procedure can be briefly outlined as follows: first, a probit model is fit
on equation (30.14); next, the generalized residuals are inserted in equation (30.13) to correct for
the effect of sample selection.
Gretl provides the heckit command to carry out estimation; its syntax is

heckit y X ; d Z

where y is the dependent variable, X is a list of regressors, d is a dummy variable holding 1 for
uncensored observations and Z is a list of explanatory variables for the censoring equation.
Since in most cases maximum likelihood is the method of choice, by default gretl computes ML
estimates. The 2-step Heckit estimates can be obtained by using the --two-step option. After
estimation, the $uhat accessor contains the generalized residuals. As in the ordinary Tobit model,
the residuals equal the difference between actual and fitted yi only for uncensored observations
(those for which di = 1).
Example 30.6 shows two estimates from the dataset used in Mroz (1987): the first one replicates
Table 22.7 in Greene (2003),1 while the second one replicates table 17.1 in Wooldridge (2002a).
1 Note that the estimates given by gretl do not coincide with those found in the printed volume. They do, however,

match those found on the errata web page for Greene’s book: http://pages.stern.nyu.edu/~wgreene/Text/Errata/
ERRATA5.htm.
Chapter 30. Discrete and censored dependent variables 257

Example 30.6: Heckit model

open mroz87.gdt

genr EXP2 = AX^2

genr WA2 = WA^2
genr KIDS = (KL6+K618)>0

# Greene’s specification

list X = const AX EXP2 WE CIT

list Z = const WA WA2 FAMINC KIDS WE

heckit WW X ; LFP Z --two-step

heckit WW X ; LFP Z

# Wooldridge’s specification

series NWINC = FAMINC - WW*WHRS

series lww = log(WW)
list X = const WE AX EXP2
list Z = X NWINC WA KL6 K618

heckit lww X ; LFP Z --two-step

30.8 Count data

Here the dependent variable is assumed to be a non-negative integer, so a probabilistic description
of yi |xi must hinge on some discrete distribution. The most common model is the Poisson model,
in which
µiY
P (yi = Y |xi ) = eµi
Y! 
X
µi = exp  xij βj 
j

In some cases, an “offset” variable is needed. The number of occurrences of yi in a given time is
assumed to be strictly proportional to the offset variable ni . In the epidemiology literature, the
offset is known as “population at risk”. In this case, the model becomes
 
X
µi = ni exp  xij βj 
j

Another way to look at the offset variable is to consider its natural log as just another explanatory
variable whose coefficient is constrained to be one.
Estimation is carried out by maximum likelihood and follows the syntax

poisson depvar indep

If an offset variable is needed, it has to be specified at the end of the command, separated from the
list of explanatory variables by a semicolon, as in

poisson depvar indep ; offset

Chapter 30. Discrete and censored dependent variables 258

It should be noted that the poisson command does not use, internally, the same optimization
engines as most other gretl command, such as arma or tobit. As a consequence, some details may
differ: the --verbose option will yield different output and settings such as bfgs_toler will not
work.

Overdispersion
In the Poisson model, E(yi |xi ) = V (yi |xi ) = µi , that is, the conditional mean equals the conditional
variance by construction. In many cases, this feature is at odds with the data, as the conditional
variance is often larger than the mean; this phenomenon is called “overdispersion”. The output
from the poisson command includes a conditional moment test for overdispersion (as per David-
son and MacKinnon (2004), section 11.5), which is printed automatically after estimation.
Overdispersion can be attributed to unmodeled heterogeneity between individuals. Two data points
with the same observable characteristics xi = xj may differ because of some unobserved scale
factor si 6= sj so that
E(yi |xi , si ) = µi si 6= µj sj = E(yj |xj , sj )
even though µi = µj . In other words, yi is a Poisson random variable conditional on both xi and si ,
but since si is unobservable, the only thing we can we can use, P (yi |xi ), will not follow the Poisson
distribution.
It is often assumed that si can be represented as a gamma random variable with mean 1 and
variance α: the parameter α is estimated together with the vector β, and measures the degree of
heterogeneity between individuals.
In this case, the conditional probability for yi given xi can be shown to be
" #yi " #α−1
Γ (yi + α−1 ) µi α−1
P (yi |xi ) = (30.16)
Γ (α−1 )Γ (yi + 1) µi + α−1 µi + α−1

which is known as the “Negative Binomial Model”. The conditional mean is still E(yi |xi ) = µi , but
the variance equals V (yi |xi ) = µi (1 + µi α). The gretl command for this model is negbin depvar
indep.

• There is also a less used variant of the negative binomial model, in which the conditional vari-
ance is a scalar multiple of the conditional mean, that is V (yi |xi ) = µi (1 + γ). To distinguish
between the two, the model (30.16) is termed “Type 2”. Gretl implements model 1 via the
option --model1.

• A script which exemplifies the above models is included among gretl’s sample scripts, under
the name camtriv.inp.

FIXME: expand.

30.9 Duration models

In some contexts we wish to apply econometric methods to measurements of the duration of certain
states. Classic examples include the following:

• From engineering, the “time to failure” of electronic or mechanical components: how long do,
say, computer hard drives last until they malfunction?

• From the medical realm: how does a new treatment affect the time from diagnosis of a certain
condition to exit from that condition (where “exit” might mean death or full recovery)?

• From economics: the duration of strikes, or of spells of unemployment.

Chapter 30. Discrete and censored dependent variables 259

In each case we may be interested in how the durations are distributed, and how they are affected
by relevant covariates. There are several approaches to this problem; the one we discuss here —
which is currently the only one supported by gretl — is estimation of a parametric model by means
of Maximum Likelihood. In this approach we hypothesize that the durations follow some definite
probability law and we seek to estimate the parameters of that law, factoring in the influence of
covariates.
We may express the density (PDF) of the durations as f (t, X, θ), where t is the length of time in the
state in question, X is a matrix of covariates, and θ is a vector of parameters. The likelihood for a
sample of n observations indexed by i is then
n
Y
L= f (ti , xi , θ)
i=1

Rather than working with the density directly, however, it is standard practice to factor f (·) into
two components, namely a hazard function, λ, and a survivor function, S. The survivor function
gives the probability that a state lasts at least as long as t; it is therefore 1 − F (t, X, θ) where F
is the CDF corresponding to the density f (·). The hazard function addresses this question: given
that a state has persisted as long as t, what is the likelihood that it ends within a short increment
of time beyond t — that is, it ends between t and t + ∆? Taking the limit as ∆ goes to zero, we end
up with the ratio of the density to the survivor function:2
f (t, X, θ)
λ(t, X, θ) = (30.17)
S(t, X, θ)
so the log-likelihood can be written as
n
X n
X
`= log f (ti , xi , θ) = log λ(ti , xi , θ) + log S(ti , xi , θ) (30.18)
i=1 i=1

One point of interest is the shape of the hazard function, in particular its dependence (or not) on
time since the state began. If λ does not depend on t we say the process in question exhibits du-
ration independence: the probability of exiting the state at any given moment neither increases nor
decreases based simply on how long the state has persisted to date. The alternatives are positive
duration dependence (the likelihood of exiting the state rises, the longer the state has persisted)
or negative duration dependence (exit becomes less likely, the longer it has persisted). Finally, the
behavior of the hazard with respect to time need not be monotonic; some parameterizations allow
for this possibility and some do not.
Since durations are inherently positive the probability distribution used in modeling must respect
this requirement, giving a density of zero for t ≤ 0. Four common candidates are the exponential,
Weibull, log-logistic and log-normal, the Weibull being the most common choice. The table below
displays the density and the hazard function for each of these distributions as they are commonly
parameterized, written as functions of t alone. (φ and Φ denote, respectively, the Gaussian PDF
and CDF.)

density, f (t) hazard, λ(t)

Exponential γ exp (−γt) γ

α α−1 α
Weibull αγ t exp [−(γt) ] αγ α t α−1
(γt)α−1 (γt)α−1
Log-logistic γα γα
[1 + (γt)α ]2 [1 + (γt)α ]
 
1   1 φ (log t − µ)/σ
Log-normal φ (log t − µ)/σ  
σt σ t Φ −(log t − µ)/σ
2 For a fuller discussion see, for example, Davidson and MacKinnon (2004).
Chapter 30. Discrete and censored dependent variables 260

The hazard is constant for the exponential distribution. For the Weibull, it is monotone increasing
in t if α > 1, or monotone decreasing for α < 1. (If α = 1 the Weibull collapses to the exponential.)
The log-logistic and log-normal distributions allow the hazard to vary with t in a non-monotonic
fashion.
Covariates are brought into the picture by allowing them to govern one of the parameters of the
density, so that the durations are not identically distributed across cases. For example, when using
the log-normal distribution it is natural to make µ, the expected value of log t, depend on the
covariates, X. This is typically done via a linear index function: µ = Xβ.
Note that the expressions for the log-normal density and hazard contain the term (log t − µ)/σ .
Replacing µ with Xβ this becomes (log t − Xβ)/σ . It turns out that this constitutes a useful simpli-
fying change of variables for all of the distributions discussed here. As in Kalbfleisch and Prentice
(2002), we define
wi ≡ (log ti − xi β)/σ
The interpretation of the scale factor, σ , in this expression depends on the distribution. For the
log-normal, σ represents the standard deviation of log t; for the Weibull and the log-logistic it
corresponds to 1/α; and for the exponential it is fixed at unity. For distributions other than the
log-normal, Xβ corresponds to − log γ, or in other words γ = exp(−Xβ).
With this change of variables, the density and survivor functions may be written compactly as
follows (the exponential is the same as the Weibull).

density, f (wi ) survivor, S(wi )

Weibull exp (wi − ewi ) exp(−ewi )
Log-logistic ewi (1 + ewi )−2 (1 + ewi )−1

Log-normal φ(wi ) Φ(−wi )

In light of the above we may think of the generic parameter vector θ, as in f (t, X, θ), as composed
of the coefficients on the covariates, β, plus (in all cases apart from the exponential) the additional
parameter σ .
A complication in estimation of θ is posed by “incomplete spells”. That is, in some cases the state
in question may not have ended at the time the observation is made (e.g. some workers remain
unemployed, some components have not yet failed). If we use ti to denote the time from entering
the state to either (a) exiting the state or (b) the observation window closing, whichever comes first,
then all we know of the “right-censored” cases (b) is that the duration was at least as long as ti .
This can be handled by rewriting the the log-likelihood (compare 30.18) as
n
X  
`i = δi log S (wi ) + (1 − δi ) − log σ + log f (wi ) (30.19)
i=1

where δi equals 1 for censored cases (incomplete spells), and 0 for complete observations. The
rationale for this is that the log-density equals the sum of the log hazard and the log survivor
function, but for the incomplete spells only the survivor function contributes to the likelihood. So
in (30.19) we are adding up the log survivor function alone for the incomplete cases, plus the full
log density for the completed cases.

Implementation in gretl and illustration

The duration command accepts a list of series on the usual pattern: dependent variable followed
by covariates. If right-censoring is present in the data this should be represented by a dummy
variable corresponding to δi above, separated from the covariates by a semicolon. For example,

duration durat 0 X ; cens

Chapter 30. Discrete and censored dependent variables 261

where durat measures durations, 0 represents the constant (which is required for such models), X
is a named list of regressors, and cens is the censoring dummy.
By default the Weibull distribution is used; you can substitute any of the other three distribu-
tions discussed here by appending one of the option flags --exponential, --loglogistic or
--lognormal.
Interpreting the coefficients in a duration model requires some care, and we will work through an
illustrative case. The example comes from section 20.3 of Wooldridge (2002a), and it concerns
criminal recidivism.3 The data (filename recid.gdt) pertain to a sample of 1,445 convicts released
from prison between July 1, 1977 and June 30, 1978. The dependent variable is the time in months
until they are again arrested. The information was gathered retrospectively by examining records
in April 1984; the maximum possible length of observation is 81 months. Right-censoring is impor-
tant: when the date were compiled about 62 percent had not been arrested. The dataset contains
several covariates, which are described in the data file; we will focus below on interpretation of the
married variable, a dummy which equals 1 if the respondent was married when imprisoned.
Example 30.7 shows the gretl commands for a Weibull model along with most of the output. Con-
sider first the scale factor, σ . The estimate is 1.241 with a standard error of 0.048. (We don’t print
a z score and p-value for this term since H0 : σ = 0 is not of interest.) Recall that σ corresponds
to 1/α; we can be confident that α is less than 1, so recidivism displays negative duration depen-
dence. This makes sense: it is plausible that if a past offender manages to stay out of trouble for
an extended period his risk of engaging in crime again diminishes. (The exponential model would
therefore not be appropriate in this case.)
On a priori grounds, however, we may doubt the monotonic decline in hazard that is implied by
the Weibull specification. Even if a person is liable to return to crime, it seems relatively unlikely
that he would do so straight out of prison. In the data, we find that only 2.6 percent of those
followed were rearrested within 3 months. The log-normal specification, which allows the hazard
to rise and then fall, may be more appropriate. Using the duration command again with the same
covariates but the --lognormal flag, we get a log-likelihood of −1597 as against −1633 for the
Weibull, confirming that the log-normal gives a better fit.
Let us now focus on the married coefficient, which is positive in both specifications but larger and
more sharply estimated in the log-normal variant. The first thing is to get the interpretation of the
sign right. Recall that Xβ enters negatively into the intermediate variable w. The Weibull hazard is
λ(wi ) = ewi , so being married reduces the hazard of re-offending, or in other words lengthens the
expected duration out of prison. The same qualitative interpretation applies for the log-normal.
To get a better sense of the married effect, it is useful to show its impact on the hazard across time.
We can do this by plotting the hazard for two values of the index function Xβ: in each case the
values of all the covariates other than married are set to their means (or some chosen values) while
married is set first to 0 then to 1. Example 30.8 provides a script that does this, and the resulting
plots are shown in Figure 30.1. Note that when computing the hazards we need to multiply by the
Jacobian of the transformation from ti to wi = log(ti − xi β)/σ , namely 1/t. Note also that the
estimate of σ is available via the accessor $sigma, but it is also present as the last element in the
coefficient vector obtained via $coeff.
A further difference between the Weibull and log-normal specifications is illustrated in the plots.
The Weibull is an instance of a proportional hazard model. This means that for any sets of values of
the covariates, xi and xj , the ratio of the associated hazards is invariant with respect to duration. In
this example the Weibull hazard for unmarried individuals is always 1.1637 times that for married.
In the log-normal variant, on the other hand, this ratio gradually declines from 1.6703 at one month
to 1.1766 at 100 months.
3 Germán Rodríguez of Princeton University has a page discussing this example and displaying estimates from Stata at

http://data.princeton.edu/pop509a/recid1.html.
Chapter 30. Discrete and censored dependent variables 262

Example 30.7: Weibull model for recidivism data

Input:
open recid.gdt
list X = workprg priors tserved felon alcohol drugs \
black married educ age
duration durat 0 X ; cens
duration durat 0 X ; cens --lognormal

Partial output:
Model 1: Duration (Weibull), using observations 1-1445
Dependent variable: durat

coefficient std. error z p-value

--------------------------------------------------------
const 4.22167 0.341311 12.37 3.85e-35 ***
workprg -0.112785 0.112535 -1.002 0.3162
priors -0.110176 0.0170675 -6.455 1.08e-10 ***
tserved -0.0168297 0.00213029 -7.900 2.78e-15 ***
felon 0.371623 0.131995 2.815 0.0049 ***
alcohol -0.555132 0.132243 -4.198 2.69e-05 ***
drugs -0.349265 0.121880 -2.866 0.0042 ***
black -0.563016 0.110817 -5.081 3.76e-07 ***
married 0.188104 0.135752 1.386 0.1659
educ 0.0289111 0.0241153 1.199 0.2306
age 0.00462188 0.000664820 6.952 3.60e-12 ***
sigma 1.24090 0.0482896

Chi-square(10) 165.4772 p-value 2.39e-30

Log-likelihood -1633.032 Akaike criterion 3290.065

Model 2: Duration (log-normal), using observations 1-1445

Dependent variable: durat

coefficient std. error z p-value

---------------------------------------------------------
const 4.09939 0.347535 11.80 4.11e-32 ***
workprg -0.0625693 0.120037 -0.5213 0.6022
priors -0.137253 0.0214587 -6.396 1.59e-10 ***
tserved -0.0193306 0.00297792 -6.491 8.51e-11 ***
felon 0.443995 0.145087 3.060 0.0022 ***
alcohol -0.634909 0.144217 -4.402 1.07e-05 ***
drugs -0.298159 0.132736 -2.246 0.0247 **
black -0.542719 0.117443 -4.621 3.82e-06 ***
married 0.340682 0.139843 2.436 0.0148 **
educ 0.0229194 0.0253974 0.9024 0.3668
age 0.00391028 0.000606205 6.450 1.12e-10 ***
sigma 1.81047 0.0623022

Chi-square(10) 166.7361 p-value 1.31e-30

Log-likelihood -1597.059 Akaike criterion 3218.118
Chapter 30. Discrete and censored dependent variables 263

Example 30.8: Create plots showing conditional hazards

open recid.gdt -q

# leave ’married’ separate for analysis

list X = workprg priors tserved felon alcohol drugs \
black educ age

# Weibull variant
duration durat 0 X married ; cens
# coefficients on all Xs apart from married
matrix beta_w = $coeff[1:$ncoeff-2]
# married coefficient
scalar mc_w = $coeff[$ncoeff-1]
scalar s_w = $sigma

# Log-normal variant
duration durat 0 X married ; cens --lognormal
matrix beta_n = $coeff[1:$ncoeff-2]
scalar mc_n = $coeff[$ncoeff-1]
scalar s_n = $sigma

list allX = 0 X
# evaluate X\beta at means of all variables except marriage
scalar Xb_w = meanc({allX}) * beta_w
scalar Xb_n = meanc({allX}) * beta_n

# construct two plot matrices

matrix mat_w = zeros(100, 3)
matrix mat_n = zeros(100, 3)

loop t=1..100 -q
# first column, duration
mat_w[t, 1] = t
mat_n[t, 1] = t
wi_w = (log(t) - Xb_w)/s_w
wi_n = (log(t) - Xb_n)/s_n
# second col: hazard with married = 0
mat_w[t, 2] = (1/t) * exp(wi_w)
mat_n[t, 2] = (1/t) * pdf(z, wi_n) / cdf(z, -wi_n)
wi_w = (log(t) - (Xb_w + mc_w))/s_w
wi_n = (log(t) - (Xb_n + mc_n))/s_n
# third col: hazard with married = 1
mat_w[t, 3] = (1/t) * exp(wi_w)
mat_n[t, 3] = (1/t) * pdf(z, wi_n) / cdf(z, -wi_n)
endloop

colnames(mat_w, "months unmarried married")

colnames(mat_n, "months unmarried married")

gnuplot 2 3 1 --with-lines --supp --matrix=mat_w --output=weibull.plt

gnuplot 2 3 1 --with-lines --supp --matrix=mat_n --output=lognorm.plt
Chapter 30. Discrete and censored dependent variables 264

Weibull
0.020
unmarried
0.018 married

0.016

0.014

0.012

0.010

0.008

0.006

0 20 40 60 80 100
months

Log-normal
0.020
unmarried
0.018 married

0.016

0.014

0.012

0.010

0.008

0.006

0 20 40 60 80 100
months

Figure 30.1: Recidivism hazard estimates for married and unmarried ex-convicts
Chapter 30. Discrete and censored dependent variables 265

Alternative representations of the Weibull model

One point to watch out for with the Weibull duration model is that the estimates may be represented
in different ways. The representation given by gretl is sometimes called the accelerated failure-time
(AFT) metric. An alternative that one sometimes sees is the log relative-hazard metric; in fact this is
the metric used in Wooldridge’s presentation of the recidivism example. To get from AFT estimates
to log relative-hazard form it is necessary to multiply the coefficients by −σ −1 . For example, the
married coefficient in the Weibull specification as shown here is 0.188104 and σ̂ is 1.24090, so the
alternative value is −0.152, which is what Wooldridge shows (2002a, Table 20.1).

Fitted values and residuals

By default, gretl computes fitted values (accessible via $yhat) as the conditional mean of duration.
The formulae are shown below (where Γ denotes the gamma function, and the exponential variant
is just Weibull with σ = 1).

Weibull Log-logistic Log-normal

πσ
exp(Xβ)Γ (1 + σ ) exp(Xβ) exp(Xβ + σ 2 /2)
sin(π σ )

The expression given for the log-logistic mean, however, is valid only for σ < 1; otherwise the
expectation is undefined, a point that is not noted in all software.4
Alternatively, if the --medians option is given, gretl’s duration command will produce conditional
medians as the content of $yhat. For the Weibull the median is exp(Xβ)(log 2)σ ; for the log-logistic
and log-normal it is just exp(Xβ).
The values we give for the accessor $uhat are generalized (Cox–Snell) residuals, computed as the
integrated hazard function, which equals the negative of the log of the survivor function:

ûi = Λ(ti , xi , θ) = − log S(ti , xi , θ)

Under the null of correct specification of the model these generalized residuals should follow the
unit exponential distribution, which has mean and variance both equal to 1 and density e−1 . See
Cameron and Trivedi (2005) for further discussion.

4 The predict adjunct to the streg command in Stata 10, for example, gaily produces large negative values for the

log-logistic mean in duration models with σ > 1.

 Chapter 31

Quantile regression

31.1 Introduction
In Ordinary Least Squares (OLS) regression, the fitted values, ŷi = Xi β̂, represent the conditional
mean of the dependent variable — conditional, that is, on the regression function and the values
of the independent variables. In median regression, by contrast and as the name implies, fitted
values represent the conditional median of the dependent variable. It turns out that the principle of
estimation for median regression is easily stated (though not so easily computed), namely, choose
β̂ so as to minimize the sum of absolute residuals. Hence the method is known as Least Absolute
Deviations or LAD. While the OLS problem has a straightforward analytical solution, LAD is a linear
programming problem.
Quantile regression is a generalization of median regression: the regression function predicts the
conditional τ-quantile of the dependent variable — for example the first quartile (τ = .25) or the
ninth decile (τ = .90).
If the classical conditions for the validity of OLS are satisfied — that is, if the error term is inde-
pendently and identically distributed, conditional on X — then quantile regression is redundant:
all the conditional quantiles of the dependent variable will march in lockstep with the conditional
mean. Conversely, if quantile regression reveals that the conditional quantiles behave in a manner
quite distinct from the conditional mean, this suggests that OLS estimation is problematic.
As of version 1.7.5, gretl offers quantile regression functionality (in addition to basic LAD regres-
sion, which has been available since early in gretl’s history via the lad command).1

31.2 Basic syntax

The basic invocation of quantile regression is

quantreg tau reglist

where

• reglist is a standard gretl regression list (dependent variable followed by regressors, including
the constant if an intercept is wanted); and

• tau is the desired conditional quantile, in the range 0.01 to 0.99, given either as a numerical
value or the name of a pre-defined scalar variable (but see below for a further option).

Estimation is via the Frisch–Newton interior point solver (Portnoy and Koenker, 1997), which is sub-
stantially faster than the “traditional” Barrodale–Roberts (1974) simplex approach for large prob-
lems.
1 We gratefully acknowledge our borrowing from the quantreg package for GNU R (version 4.17). The core of the

quantreg package is composed of Fortran code written by Roger Koenker; this is accompanied by various driver and
auxiliary functions written in the R language by Koenker and Martin Mächler. The latter functions have been re-worked
in C for gretl. We have added some guards against potential numerical problems in small samples.

266
Chapter 31. Quantile regression 267

By default, standard errors are computed according to the asymptotic formula given by Koenker
and Bassett (1978). Alternatively, if the --robust option is given, we use the sandwich estimator
developed in Koenker and Zhao (1994).2

31.3 Confidence intervals

An option --intervals is available. When this is given we print confidence intervals for the para-
meter estimates instead of standard errors. These intervals are computed using the rank inversion
method and in general they are asymmetrical about the point estimates — that is, they are not
simply “plus or minus so many standard errors”. The specifics of the calculation are inflected by
the --robust option: without this, the intervals are computed on the assumption of IID errors
(Koenker, 1994); with it, they use the heteroskedasticity-robust estimator developed by Koenker
and Machado (1999).
By default, 90 percent intervals are produced. You can change this by appending a confidence value
(expressed as a decimal fraction) to the intervals option, as in

quantreg tau reglist --intervals=.95

When the confidence intervals option is selected, the parameter estimates are calculated using
the Barrodale–Roberts method. This is simply because the Frisch–Newton code does not currently
support the calculation of confidence intervals.
Two further details. First, the mechanisms for generating confidence intervals for quantile esti-
mates require that the model has at least two regressors (including the constant). If the --intervals
option is given for a model containing only one regressor, an error is flagged. Second, when a model
is estimated in this mode, you can retrieve the confidence intervals using the accessor $coeff_ci.
This produces a k × 2 matrix, where k is the number of regressors. The lower bounds are in the
first column, the upper bounds in the second. See also section 31.5 below.

31.4 Multiple quantiles

As a further option, you can give tau as a matrix — either the name of a predefined matrix or in
numerical form, as in {.05, .25, .5, .75, .95}. The given model is estimated for all the τ
values and the results are printed in a special form, as shown below (in this case the --intervals
option was also given).

Model 1: Quantile estimates using the 235 observations 1-235

Dependent variable: foodexp
With 90 percent confidence intervals

VARIABLE TAU COEFFICIENT LOWER UPPER

const 0.05 124.880 98.3021 130.517

0.25 95.4835 73.7861 120.098
0.50 81.4822 53.2592 114.012
0.75 62.3966 32.7449 107.314
0.95 64.1040 46.2649 83.5790

income 0.05 0.343361 0.343327 0.389750

0.25 0.474103 0.420330 0.494329
0.50 0.560181 0.487022 0.601989
0.75 0.644014 0.580155 0.690413
0.95 0.709069 0.673900 0.734441
2 These correspond to the iid and nid options in R’s quantreg package, respectively.
Chapter 31. Quantile regression 268

Coefficient on income
0.75
Quantile estimates with 90% band
OLS estimate with 90% band
0.7

0.65

0.6

0.55

0.5

0.45

0.4

0.35

0.3
0 0.2 0.4 0.6 0.8 1
tau

Figure 31.1: Regression of food expenditure on income; Engel’s data

The gretl GUI has an entry for Quantile Regression (under /Model/Robust estimation), and you can
select multiple quantiles there too. In that context, just give space-separated numerical values (as
per the predefined options, shown in a drop-down list).
When you estimate a model in this way most of the standard menu items in the model window
are disabled, but one extra item is available — graphs showing the τ sequence for a given coef-
ficient in comparison with the OLS coefficient. An example is shown in Figure 31.1. This sort of
graph provides a simple means of judging whether quantile regression is redundant (OLS is fine) or
informative.
In the example shown — based on data on household income and food expenditure gathered by
Ernst Engel (1821–1896) — it seems clear that simple OLS regression is potentially misleading. The
“crossing” of the OLS estimate by the quantile estimates is very marked.
However, it is not always clear what implications should be drawn from this sort of conflict. With
the Engel data there are two issues to consider. First, Engel’s famous “law” claims an income-
elasticity of food consumption that is less than one, and talk of elasticities suggests a logarithmic
formulation of the model. Second, there are two apparently anomalous observations in the data
set: household 105 has the third-highest income but unexpectedly low expenditure on food (as
judged from a simple scatter plot), while household 138 (which also has unexpectedly low food
consumption) has much the highest income, almost twice that of the next highest.
With n = 235 it seems reasonable to consider dropping these observations. If we do so, and adopt
a log–log formulation, we get the plot shown in Figure 31.2. The quantile estimates still cross the
OLS estimate, but the “evidence against OLS” is much less compelling: the 90 percent confidence
bands of the respective estimates overlap at all the quantiles considered.

31.5 Large datasets

As noted above, when you give the --intervals option with the quantreg command, which calls
for estimation of confidence intervals via rank inversion, gretl switches from the default Frisch–
Newton algorithm to the Barrodale–Roberts simplex method.
Chapter 31. Quantile regression 269

Coefficient on log(income)
0.96

0.94

0.92

0.9

0.88

0.86

0.84

0.82

0.8

0.78
Quantile estimates with 90% band
OLS estimate with 90% band
0.76
0 0.2 0.4 0.6 0.8 1
tau

Figure 31.2: Log–log regression; 2 observations dropped from full Engel data set.

This is OK for moderately large datasets (up to, say, a few thousand observations) but on very large
problems the simplex algorithm may become seriously bogged down. For example, Koenker and
Hallock (2001) present an analysis of the determinants of birth weights, using 198377 observations
and with 15 regressors. Generating confidence intervals via Barrodale–Roberts for a single value of
τ took about half an hour on a Lenovo Thinkpad T60p with 1.83GHz Intel Core 2 processor.
If you want confidence intervals in such cases, you are advised not to use the --intervals option,
but to compute them using the method of “plus or minus so many standard errors”. (One Frisch–
Newton run took about 8 seconds on the same machine, showing the superiority of the interior
point method.) The script below illustrates:

quantreg .10 y 0 xlist

scalar crit = qnorm(.95)
matrix ci = $coeff - crit * $stderr
ci = ci~($coeff + crit * $stderr)
print ci

The matrix ci will contain the lower and upper bounds of the (symmetrical) 90 percent confidence
intervals.
To avoid a situation where gretl becomes unresponsive for a very long time we have set the maxi-
mum number of iterations for the Borrodale–Roberts algorithm to the (somewhat arbitrary) value
of 1000. We will experiment further with this, but for the meantime if you really want to use this
method on a large dataset, and don’t mind waiting for the results, you can increase the limit using
the set command with parameter rq_maxiter, as in

set rq_maxiter 5000

 Chapter 32

Nonparametric methods

The main focus of gretl is on parametric estimation, but we offer a selection of nonparametric
methods. The most basic of these

• various tests for difference in distribution (Sign test, Wilcoxon rank-sum test, Wilcoxon signed-
rank test);

• the Runs test for randomness; and

• nonparametric measures of association: Spearman’s rho and Kendall’s tau.

Details on the above can be found by consulting the help for the commands difftest, runs, corr
and spearman. In the GUI program these items are found under the Tools menu and the Robust
estimation item under the Model menu.
In this chapter we concentrate on two relatively complex methods for nonparametric curve-fitting
and prediction, namely William Cleveland’s “loess” (also known as “lowess”) and the Nadaraya–
Watson estimator.

32.1 Locally weighted regression (loess)

Loess (Cleveland, 1979) is a nonparametric smoother employing locally weighted polynomial re-
gression. It is intended to yield an approximation to g(·) when the dependent variable, y, can be
expressed as
yi = g(xi ) + i
for some smooth function g(·).
Given a sample of n observations on the variables y and x, the procedure is to run a weighted least
squares regression (a polynomial of order d = 0, 1 or 2 in x) localized to each data point, i. In each
such regression the sample consists of the r nearest neighbors (in the x dimension) to the point i,
with weights that are inversely related to the distance |xi − xk |, k = 1, . . . , r . The predicted value
ŷi is then obtained by evaluating the estimated polynomial at xi . The most commonly used order
is d = 1.
A bandwidth parameter 0 < q ≤ 1 controls the proportion of the total number of data points used
in each regression; thus r = qn (rounded up to an integer). Larger values of q lead to a smoother
fitted series, smaller values to a series that tracks the actual data more closely; 0.25 ≤ q ≤ 0.5 is
often a suitable range.
In gretl’s implementation of loess the weighting scheme is that given by Cleveland, namely,

wk (xi ) = W (h−1
i (xk − xi ))

where hi is the distance between xi and its r th nearest neighbor, and W (·) is the tricube function,

(1 − |x|3 )3
(
for |x| < 1
W (x) =
0 for |x| ≥ 1

270
Chapter 32. Nonparametric methods 271

The local regression can be made robust via an adjustment based on the residuals, ei = yi − ŷi .
Robustness weights, δk , are defined by

δk = B(ek /6s)

where s is the median of the |ei | and B(·) is the bisquare function,

(1 − x 2 )2
(
for |x| < 1
B(x) =
0 for |x| ≥ 1

The polynomial regression is then re-run using weight δk wk (xi ) at (xk , yk ).

The loess() function in gretl takes up to five arguments as follows: the y series, the x series, the
order d, the bandwidth q, and a boolean switch to turn on the robust adjustment. The last three
arguments are optional: if they are omitted the default values are d = 1, q = 0.5 and no robust
adjustment. An example of a full call to loess() is shown below; in this case a quadratic in x is
specified, three quarters of the data points will be used in each local regression, and robustness is
turned on:

series yh = loess(y, x, 2, 0.75, 1)

An illustration of loess is provided in Example 32.1: we generate a series that has a deterministic
sine wave component overlaid with noise uniformly distributed on (−1, 1). Loess is then used to
retrieve a good approximation to the sine function. The resulting graph is shown in Figure 32.1.

Example 32.1: Loess script

nulldata 120
series x = index
scalar n = $nobs
series y = sin(2*pi*x/n) + uniform(-1, 1)
series yh = loess(y, x, 2, 0.75, 0)
gnuplot y yh x --output=display --with-lines=yh

2
loess fit
1.5

0.5

-0.5

-1

-1.5

-2
0 20 40 60 80 100 120
x

Figure 32.1: Loess: retrieving a sine wave

Chapter 32. Nonparametric methods 272

32.2 The Nadaraya–Watson estimator

The Nadaraya–Watson nonparametric estimator (Nadaraya, 1964; Watson, 1964) is an estimator
for the conditional mean of a variable Y , available in a sample of size n, for a given value of a
conditioning variable X, and is defined as
Pn
j=1 yj · Kh (X − xj )
m(X) = Pn
j=1 Kh (X − xj )

where Kh (·) is the so-called kernel function, which is usually some simple transform of a density
function that depends on a scalar called the bandwidth. The one gretl uses is given by
!
x2
Kh (x) = exp −
2h

for |x| < τ and zero otherwise. The scalar τ is used to prevent numerical problems when the
kernel function is evaluated too far away from zero and is called the trim parameter.

Example 32.2: Nadaraya–Watson example

# Nonparametric regression example: husband’s age on wife’s age

open mroz87.gdt

# initial value for the bandwidth

scalar h = $nobs^(-0.2)
# three increasingly smoother estimates
series m0 = nadarwat(HA, WA, h)
series m1 = nadarwat(HA, WA, h * 5)
series m2 = nadarwat(HA, WA, h * 10)

# produce the graph

dataset sortby WA
gnuplot m0 m1 m2 HA WA --output=display --with-lines

Example 32.2 produces the graph shown in Figure 32.2 (after some slight editing).
The choice of the bandwidth is up to the user: larger values of h lead to a smoother m(·) function;
smaller values make the m(·) function follow the yi values more closely, so that the function
appears more “jagged”. In fact, as h → ∞, m(xi ) → Ȳ ; on the contrary, if h → 0, observations for
which xi 6= X are not taken into account at all when computing m(X).
Also, the statistical properties of m(·) vary with h: its variance can be shown to be decreasing in
h, while its squared bias is increasing in h. It can be shown that choosing h ∼ n−1/5 minimizes the
RMSE, so that value is customarily taken as a reference point.
Note that the kernel function has its tails “trimmed”. The scalar τ, which controls the level at
which trimming occurs is set by default at 4 · h; this setting, however, may be changed via the set
command. For example,

set nadarwat_trim 10

sets τ = 10 · h. This may at times produce more sensible results in regions of X with sparse
support; however, you should be aware that in those same cases machine precision (division by
numerical zero) may render your results spurious. The default is relatively safe, but experimenting
with larger values may be a sensible strategy in some cases.
Chapter 32. Nonparametric methods 273

60
m0
m1
m2

55

HA 50

45

40

35

30
30 35 40 45 50 55 60
WA

Figure 32.2: Nadaraya–Watson example for several choices of the bandwidth parameter

A common variant of the Nadaraya–Watson estimator is the so-called “leave-one-out” estimator:

this is a variant of the estimator that does not use the i-th observation for evaluating m(xi ). This
makes the estimator more robust numerically and its usage is often advised for inference purposes.
In formulae, the leave-one-out estimator is
P
j6=i yj · Kh (xi − xj )
m(xi ) = P
j6=i Kh (xi − xj )

In order to have gretl compute the leave-one-out estimator, just reverse the sign of h: if we changed
example 32.2 by substituting

scalar h = $nobs^(-0.2)

with

scalar h = -($nobs^(-0.2))

the rest of the example would have stayed unchanged, the only difference being the usage of the
leave-one-out estimator.
Although X could be, in principle, any value, in the typical usage of this estimator you want to
compute m(X) for X equal to one or more values actually observed in your sample, that is m(xi ).
If you need a point estimate of m(X) for some value of X which is not present among the valid
observations of your dependent variable, you may want to add some “fake” observations to your
dataset in which y is missing and x contains the values you want m(x) evaluated at. For example,
the following script evaluates m(x) at regular intervals between -2.0 and 2.0:

nulldata 120
set seed 120496

# first part of the sample: actual data

smpl 1 100
Chapter 32. Nonparametric methods 274

x = normal()
y = x^2 + sin(x) + normal()

# second part of the sample: fake x data

smpl 101 120
x = (obs-110) / 5

# compute the Nadaraya-Watson estimate

# with bandwidth equal to 0.4 (note that
# 100^(-0.2) = 0.398)
smpl full
m = nadarwat(y, x, 0.4)

# show m(x) for the fake x values only

smpl 101 120
print x m -o

and running it produces

x m

101 -1.8 1.165934

102 -1.6 0.730221
103 -1.4 0.314705
104 -1.2 0.026057
105 -1.0 -0.131999
106 -0.8 -0.215445
107 -0.6 -0.269257
108 -0.4 -0.304451
109 -0.2 -0.306448
110 0.0 -0.238766
111 0.2 -0.038837
112 0.4 0.354660
113 0.6 0.908178
114 0.8 1.485178
115 1.0 2.000003
116 1.2 2.460100
117 1.4 2.905176
118 1.6 3.380874
119 1.8 3.927682
120 2.0 4.538364
 Part III

Technical details

275
 Chapter 33

Gretl and TEX

33.1 Introduction
TEX — initially developed by Donald Knuth of Stanford University and since enhanced by hundreds
of contributors around the world — is the gold standard of scientific typesetting. Gretl provides
various hooks that enable you to preview and print econometric results using the TEX engine, and
to save output in a form suitable for further processing with TEX.
This chapter explains the finer points of gretl’s TEX-related functionality. The next section describes
the relevant menu items; section 33.3 discusses ways of fine-tuning TEX output; and section 33.4
gives some pointers on installing (and learning) TEX if you do not already have it on your computer.
(Just to be clear: TEX is not included with the gretl distribution; it is a separate package, including
several programs and a large number of supporting files.)
Before proceeding, however, it may be useful to set out briefly the stages of production of a final
document using TEX. For the most part you don’t have to worry about these details, since, in regard
to previewing at any rate, gretl handles them for you. But having some grasp of what is going on
behind the scences will enable you to understand your options better.
The first step is the creation of a plain text “source” file, containing the text or mathematics to be
typset, interspersed with mark-up that defines how it should be formatted. The second step is to
run the source through a processing engine that does the actual formatting. Typically this is either:

• a program called latex that generates so-called DVI (device-independent) output, or

• (more commonly nowadays) a program called pdflatex that generates PDF output.1

For previewing, one uses either a DVI viewer (typically xdvi on GNU/Linux systems) or a PDF viewer
(for example, Adobe’s Acrobat Reader or xpdf), depending on how the source was processed. If
the DVI route is taken, there’s then a third step to produce printable output, typically using the
program dvips to generate a PostScript file. If the PDF route is taken, the output is ready for
printing without any further processing.
On MS Windows and Mac OS X, gretl calls pdflatex to process the source file, and expects the
operating system to be able to find the default viewer for PDF output; DVI is not supported. On
GNU/Linux the default is also to produce PDF, but if you prefer the DVI/PostScript route you can do
the following: select the menu item “Tools, Preferences, General” then the “Programs” tab. Find the
item titled “Command to compile TeX files”, and set this to latex. In the same window, Make sure
the commands to view DVI and PostScript files are set to something appropriate for your system.

33.2 TEX-related menu items

The model window
The fullest TEX support in gretl is found in the GUI model window. This has a menu item titled
“LaTeX” with sub-items “View”, “Copy”, “Save” and “Equation options” (see Figure 33.1).
1 Experts will be aware of something called “plain T X”, which is processed using the program tex. The great majority
E
of TEX users, however, use the LATEX macros, initially developed by Leslie Lamport. Gretl does not support plain TEX.

276
Chapter 33. Gretl and TEX 277

Figure 33.1: LATEX menu in model window

The first three sub-items have branches titled “Tabular” and “Equation”. By “Tabular” we mean that
the model is represented in the form of a table; this is the fullest and most explicit presentation of
the results. See Table 33.1 for an example; this was pasted into the manual after using the “Copy,
Tabular” item in gretl (a few lines were edited out for brevity).

Table 33.1: Example of LATEX tabular output

Model 1: OLS estimates using the 51 observations 1–51

Dependent variable: ENROLL

Variable Coefficient Std. Error t-statistic p-value

const 0.241105 0.0660225 3.6519 0.0007

CATHOL 0.223530 0.0459701 4.8625 0.0000
PUPIL −0.00338200 0.00271962 −1.2436 0.2198
WHITE −0.152643 0.0407064 −3.7499 0.0005

Mean of dependent variable 0.0955686

S.D. of dependent variable 0.0522150
Sum of squared residuals 0.0709594
Standard error of residuals (σ̂ ) 0.0388558
Unadjusted R 2 0.479466
Adjusted R̄ 2 0.446241
F (3, 47) 14.4306

The “Equation” option is fairly self-explanatory — the results are written across the page in equa-
tion format, as below:

ENROLL
Æ = 0.241105 + 0.223530 CATHOL − 0.00338200 PUPIL − 0.152643 WHITE
(0.066022) (0.04597) (0.0027196) (0.040706)

T = 51 R̄ 2 = 0.4462 F (3, 47) = 14.431 σ̂ = 0.038856

(standard errors in parentheses)

The distinction between the “Copy” and “Save” options (for both tabular and equation) is twofold.
First, “Copy” puts the TEX source on the clipboard while with “Save” you are prompted for the name
of a file into which the source should be saved. Second, with “Copy” the material is copied as a
Chapter 33. Gretl and TEX 278

“fragment” while with “Save” it is written as a complete file. The point is that a well-formed TEX
source file must have a header that defines the documentclass (article, report, book or whatever)
and tags that say \begin{document} and \end{document}. This material is included when you do
“Save” but not when you do “Copy”, since in the latter case the expectation is that you will paste
the data into an existing TEX source file that already has the relevant apparatus in place.
The items under “Equation options” should be self-explanatory: when printing the model in equa-
tion form, do you want standard errors or t-ratios displayed in parentheses under the parameter
estimates? The default is to show standard errors; if you want t-ratios, select that item.

Other windows
Several other sorts of output windows also have TEX preview, copy and save enabled. In the case of
windows having a graphical toolbar, look for the TEX button. Figure 33.2 shows this icon (second
from the right on the toolbar) along with the dialog that appears when you press the button.

Figure 33.2: TEX icon and dialog

One aspect of gretl’s TEX support that is likely to be particularly useful for publication purposes is
the ability to produce a typeset version of the “model table” (see section 3.4). An example of this is
shown in Table 33.2.

33.3 Fine-tuning typeset output

There are three aspects to this: adjusting the appearance of the output produced by gretl in
LATEX preview mode; adjusting the formatting of gretl’s tabular output for models when using the
tabprint command; and incorporating gretl’s output into your own TEX files.

Previewing in the GUI

As regards preview mode, you can control the appearance of gretl’s output using a file named
gretlpre.tex, which should be placed in your gretl user directory (see the Gretl Command Ref-
erence). If such a file is found, its contents will be used as the “preamble” to the TEX source. The
default value of the preamble is as follows:

\documentclass[11pt]{article}
\usepackage[utf8]{inputenc}
\usepackage{amsmath}
\usepackage{dcolumn,longtable}
\begin{document}
\thispagestyle{empty}
Chapter 33. Gretl and TEX 279

Table 33.2: Example of model table output

OLS estimates
Dependent variable: ENROLL

Model 1 Model 2 Model 3

const 0.2907∗∗ 0.2411∗∗ 0.08557

(0.07853) (0.06602) (0.05794)

CATHOL 0.2216∗∗ 0.2235∗∗ 0.2065∗∗

(0.04584) (0.04597) (0.05160)

PUPIL −0.003035 −0.003382 −0.001697

(0.002727) (0.002720) (0.003025)
∗∗ ∗∗
WHITE −0.1482 −0.1526
(0.04074) (0.04071)

ADMEXP −0.1551
(0.1342)

n 51 51 51
2
R̄ 0.4502 0.4462 0.2956
` 96.09 95.36 88.69

Standard errors in parentheses

* indicates significance at the 10 percent level
** indicates significance at the 5 percent level
Chapter 33. Gretl and TEX 280

Note that the amsmath and dcolumn packages are required. (For some sorts of output the longtable
package is also needed.) Beyond that you can, for instance, change the type size or the font by al-
tering the documentclass declaration or including an alternative font package.
In addition, if you wish to typeset gretl output in more than one language, you can set up per-
language preamble files. A “localized” preamble file is identified by a name of the form gretlpre_xx.tex,
where xx is replaced by the first two letters of the current setting of the LANG environment vari-
able. For example, if you are running the program in Polish, using LANG=pl_PL, then gretl will do
the following when writing the preamble for a TEX source file.

1. Look for a file named gretlpre_pl.tex in the gretl user directory. If this is not found, then

2. look for a file named gretlpre.tex in the gretl user directory. If this is not found, then

3. use the default preamble.

Conversely, suppose you usually run gretl in a language other than English, and have a suitable
gretlpre.tex file in place for your native language. If on some occasions you want to produce TEX
output in English, then you could create an additional file gretlpre_en.tex: this file will be used
for the preamble when gretl is run with a language setting of, say, en_US.

Command-line options
After estimating a model via a script — or interactively via the gretl console or using the command-
line program gretlcli — you can use the commands tabprint or eqnprint to print the model to
file in tabular format or equation format respectively. These options are explained in the Gretl
Command Reference.
If you wish alter the appearance of gretl’s tabular output for models in the context of the tabprint
command, you can specify a custom row format using the --format flag. The format string must
be enclosed in double quotes and must be tied to the flag with an equals sign. The pattern for the
format string is as follows. There are four fields, representing the coefficient, standard error, t-
ratio and p-value respectively. These fields should be separated by vertical bars; they may contain
a printf-type specification for the formatting of the numeric value in question, or may be left
blank to suppress the printing of that column (subject to the constraint that you can’t leave all the
columns blank). Here are a few examples:

--format="%.4f|%.4f|%.4f|%.4f"
--format="%.4f|%.4f|%.3f|"
--format="%.5f|%.4f||%.4f"
--format="%.8g|%.8g||%.4f"

The first of these specifications prints the values in all columns using 4 decimal places. The second
suppresses the p-value and prints the t-ratio to 3 places. The third omits the t-ratio. The last one
again omits the t, and prints both coefficient and standard error to 8 significant figures.
Once you set a custom format in this way, it is remembered and used for the duration of the gretl
session. To revert to the default formatting you can use the special variant --format=default.

Further editing
Once you have pasted gretl’s TEX output into your own document, or saved it to file and opened it
in an editor, you can of course modify the material in any wish you wish. In some cases, machine-
generated TEX is hard to understand, but gretl’s output is intended to be human-readable and
-editable. In addition, it does not use any non-standard style packages. Besides the standard LATEX
document classes, the only files needed are, as noted above, the amsmath, dcolumn and longtable
packages. These should be included in any reasonably full TEX implementation.
Chapter 33. Gretl and TEX 281

33.4 Installing and learning TEX

This is not the place for a detailed exposition of these matters, but here are a few pointers.
So far as we know, every GNU/Linux distribution has a package or set of packages for TEX, and in
fact these are likely to be installed by default. Check the documentation for your distribution. For
MS Windows, several packaged versions of TEX are available: one of the most popular is MiKTEX at
http://www.miktex.org/. For Mac OS X a nice implementation is iTEXMac, at http://itexmac.
sourceforge.net/. An essential starting point for online TEX resources is the Comprehensive TEX
Archive Network (CTAN) at http://www.ctan.org/.
As for learning TEX, many useful resources are available both online and in print. Among online
guides, Tony Roberts’ “LATEX: from quick and dirty to style and finesse” is very helpful, at
http://www.sci.usq.edu.au/staff/robertsa/LaTeX/latexintro.html
An excellent source for advanced material is The LATEX Companion (Goossens et al., 2004).
 Chapter 34

Gretl and R

34.1 Introduction
R is, by far, the largest free statistical project.1 Like gretl, it is a GNU project and the two have a
lot in common; however, gretl’s approach focuses on ease of use much more than R, which instead
aims to encompass the widest possible range of statistical procedures.
As is natural in the free software ecosystem, we don’t view ourselves as competitors to R,2 but
rather as projects sharing a common goal who should support each other whenever possible. For
this reason, gretl provides a way to interact with R and thus enable users to pool the capabilities of
the two packages.
In this chapter, we will explain how to exploit R’s power from within gretl. We assume that the
reader has a working installation of R available and a basic grasp of R’s syntax.3
Despite several valiant attempts, no graphical shell has gained wide acceptance in the R community:
by and large, the standard method of working with R is by writing scripts, or by typing commands
at the R prompt, much in the same way as one would write gretl scripts or work with the gretl
console. In this chapter, the focus will be on the methods available to execute R commands without
leaving gretl.

34.2 Starting an interactive R session

The easiest way to use R from gretl is in interactive mode. Once you have your data loaded in gretl,
you can select the menu item “Tools, Start GNU R” and an interactive R session will be started, with
your dataset automatically pre-loaded.

A simple example: OLS on cross-section data

For this example we use Ramanathan’s dataset data4-1, one of the sample files supplied with gretl.
We first run, in gretl, an OLS regression of price on sqft, bedrms and baths. The basic results are
shown in Table 34.1.

Table 34.1: OLS house price regression via gretl

Variable Coefficient Std. Error t-statistic p-value

const 129.062 88.3033 1.4616 0.1746

sqft 0.154800 0.0319404 4.8465 0.0007
bedrms −21.587 27.0293 −0.7987 0.4430
baths −12.192 43.2500 −0.2819 0.7838

1 R’shomepage is at http://www.r-project.org/.
2 OK, who are we kidding? But it’s friendly competition!
3 The main reference for R documentation is http://cran.r-project.org/manuals.html. In addition, R tutorials

abound on the Net; as always, Google is your friend.

282
Chapter 34. Gretl and R 283

We will now replicate the above results using R. Select the menu item “Tools, Start GNU R”. A
window similar to the one shown in figure 34.1 should appear.

Figure 34.1: R window

The actual look of the R window may be somewhat different from what you see in Figure 34.1
(especially for Windows users), but this is immaterial. The important point is that you have a
window where you can type commands to R. If the above procedure doesn’t work and no R window
opens, it means that gretl was unable to launch R. You should ensure that R is installed and working
on your system and that gretl knows where it is. The relevant settings can be found by selecting
the “Tools, Preferences, General” menu entry, under the “Programs” tab.
Assuming R was launched successfully, you will see notification that the data from gretl are avail-
able. In the background, gretl has arranged for two R commands to be executed, one to load the
gretl dataset in the form of a data frame (one of several forms in which R can store data) and one
to attach the data so that the variable names defined in the gretl workspace are available as valid
identifiers within R.
In order to replicate gretl’s OLS estimation, go into the R window and type at the prompt

model <- lm(price ~ sqft + bedrms + baths)

summary(model)

You should see something similar to Figure 34.2. Surprise — the estimates coincide! To get out,
just close the R window or type q() at the R prompt.

Time series data

We now turn to an example which uses time series data: we will compare gretl’s and R’s estimates
of Box and Jenkins’ immortal “airline” model. The data are contained in the bjg sample dataset.
The following gretl code

open bjg
arima 0 1 1 ; 0 1 1 ; lg --nc

produces the estimates shown in Table 34.2.

Chapter 34. Gretl and R 284

Figure 34.2: OLS regression on house prices via R

Table 34.2: Airline model from Box and Jenkins (1976) — selected portion of gretl’s estimates

Variable Coefficient Std. Error t-statistic p-value

θ1 −0.401824 0.0896421 −4.4825 0.0000

Θ1 −0.556936 0.0731044 −7.6184 0.0000
Variance of innovations 0.00134810
Log-likelihood 244.696
Akaike information criterion −483.39
Chapter 34. Gretl and R 285

If we now open an R session as described in the previous subsection, the data-passing mechanism
is slightly different. Since our data were defined in gretl as time series, we use an R time-series
object (ts for short) for the transfer. In this way we can retain in R useful information such as the
periodicity of the data and the sample limits. The downside is that the names of individual series,
as defined in gretl, are not valid identifiers. In order to extract the variable lg, one needs to use the
syntax lg <- gretldata[, "lg"].
ARIMA estimation can be carried out by issuing the following two R commands:

lg <- gretldata[, "lg"]

arima(lg, c(0,1,1), seasonal=c(0,1,1))

which yield

Coefficients:
ma1 sma1
-0.4018 -0.5569
s.e. 0.0896 0.0731

sigma^2 estimated as 0.001348: log likelihood = 244.7, aic = -483.4

Happily, the estimates again coincide.

34.3 Running an R script

Opening an R window and keying in commands is a convenient method when the job is small. In
some cases, however, it would be preferable to have R execute a script prepared in advance. One
way to do this is via the source() command in R. Alternatively, gretl offers the facility to edit an R
script and run it, having the current dataset pre-loaded automatically. This feature can be accessed
via the “File, Script Files” menu entry. By selecting “User file”, one can load a pre-existing R script;
if you want to create a new script instead, select the “New script, R script” menu entry.

Figure 34.3: Editing window for R scripts

In either case, you are presented with a window very similar to the editor window used for ordinary
gretl scripts, as in Figure 34.3.
There are two main differences. First, you get syntax highlighting for R’s syntax instead of gretl’s.
Second, clicking on the Execute button (the gears icon), launches an instance of R in which your
commands are executed. Before R is actually run, you are asked if you want to run R interactively
or not (see Figure 34.4).
An interactive run opens an R instance similar to the one seen in the previous section: your data
will be pre-loaded (if the “pre-load data” box is checked) and your commands will be executed.
Once this is done, you will find yourself at the R prompt, where you can enter more commands.
Chapter 34. Gretl and R 286

Figure 34.4: Editing window for R scripts

A non-interactive run, on the other hand, will execute your script, collect the output from R and
present it to you in an output window; R will be run in the background. If, for example, the script
in Figure 34.3 is run non-interactively, a window similar to Figure 34.5 will appear.

Figure 34.5: Output from a non-interactive R run

34.4 Taking stuff back and forth

As regards the passing of data between the two programs, so far we have only considered passing
series from gretl to R. In order to achieve a satisfactory degree of interoperability, more is needed.
In the following sub-sections we see how matrices can be exchanged, and how data can be passed
from R back to gretl.
Chapter 34. Gretl and R 287

Passing matrices from gretl to R

For passing matrices from gretl to R, you can use the mwrite matrix function described in section
13.6. For example, the following gretl code fragment generates the matrix
 
3 7 11
 4 8 12 
 
A=
 5

 9 13 

6 10 14

and stores it into the file mymatfile.mat.

matrix A = mshape(seq(3,14),4,3)
err = mwrite(A, "mymatfile.mat")

In order to retrieve this matrix from R, all you have to do is

A <- as.matrix(read.table("mymatfile.mat", skip=1))

Although in principle you can give your matrix file any valid filename, a couple of conventions may
prove useful. First, you may want to use an informative file suffix such as “.mat”, but this is a
matter of taste. More importantly, the exact location of the file created by mwrite could be an
issue. By default, if no path is specified in the file name, gretl stores matrix files in the current
work directory. However, it may be wise for the purpose at hand to use the directory in which gretl
stores all its temporary files, whose name is stored in the built-in string dotdir (see section 12.2).
The value of this string is automatically passed to R as the string variable gretl.dotdir, so the
above example may be rewritten more cleanly as
Gretl side:

matrix A = mshape(seq(3,14),4,3)
err = mwrite(A, "@dotdir/mymatfile.mat")

R side:

fname <- paste(gretl.dotdir, "mymatfile.mat", sep="")

A <- as.matrix(read.table(fname, skip=1))

Passing data from R to gretl

For passing data in the opposite direction, gretl defines a special function that can be used in the R
environment. An R object will be written as a temporary file in gretl’s dotdir directory, from where
it can be easily retrieved from within gretl.
The name of this function is gretl.export(), and it accepts one argument, the object to be ex-
ported. At present, the objects that can be exported with this method are matrices, data frames
and time-series objects. The function creates a text file, with the same name as the exported object,
in gretl’s temporary directory. Data frames and time-series objects are stored as CSV files, and can
be retrieved by using gretl’s append command. Matrices are stored in a special text format that is
understood by gretl (see section 13.6); the file suffix is in this case .mat, and to read the matrix in
gretl you must use the mread() function.
As an example, we take the airline data and use them to estimate a structural time series model à
la Harvey (1989). The model we will use is the Basic Structural Model (BSM), in which a time series
is decomposed into three terms:
yt = µt + γt + εt
Chapter 34. Gretl and R 288

where µt is a trend component, γt is a seasonal component and εt is a noise term. In turn, the
following is assumed to hold:

∆µt = βt−1 + ηt
∆βt = ζt
∆s γt = ∆ωt

where ∆s is the seasonal differencing operator, (1 − Ls ), and ηt , ζt and ωt are mutually uncorre-
lated white noise processes. The object of the analysis is to estimate the variances of the noise
components (which may be zero) and to recover estimates of the latent processes µt (the “level”),
βt (the “slope”) and γt .
Gretl does not provide (yet) a command for estimating this class of models, so we will use R’s
StructTS command and import the results back into gretl. Once the bjg dataset is loaded in gretl,
we pass the data to R and execute the following script:

# extract the log series

y <- gretldata[, "lg"]
# estimate the model
strmod <- StructTS(y)
# save the fitted components (smoothed)
compon <- as.ts(tsSmooth(strmod))
# save the estimated variances
vars <- as.matrix(strmod$coef)

# export into gretl’s temp dir

gretl.export(compon)
gretl.export(vars)

Running this script via gretl produces minimal output:

current data loaded as ts object "gretldata"

wrote /home/cottrell/.gretl/compon.csv
wrote /home/cottrell/.gretl/vars.mat

However, we are now able to pull the results back into gretl by executing the following commands,
either from the console or by creating a small script:4

append @dotdir/compon.csv
vars = mread("@dotdir/vars.mat")

The first command reads the estimated time-series components from a CSV file, which is the format
that the passing mechanism employs for series. The matrix vars is read from the file vars.mat.
After the above commands have been executed, three new series will have appeared in the gretl
workspace, namely the estimates of the three components; by plotting them together with the
original data, you should get a graph similar to Figure 34.6. The estimates of the variances can be
seen by printing the vars matrix, as in

? print vars
vars (4 x 1)

0.00077185
0.0000
0.0013969
0.0000
4 This example will work on Linux and presumably on OSX without modifications. On the Windows platform, you may

have to substitute the “/” character with “\”.

Chapter 34. Gretl and R 289

lg level
6.6 6.2
6.4 6
6.2
5.8
6
5.8 5.6
5.6 5.4
5.4 5.2
5.2
5
5
4.8 4.8
4.6 4.6
1949 1955 1961 1949 1955 1961

slope sea
0.01025 0.3
0.25
0.0102 0.2
0.15
0.01015 0.1
0.05
0
0.0101 -0.05
-0.1
0.01005 -0.15
-0.2
0.01 -0.25
1949 1955 1961 1949 1955 1961

Figure 34.6: Estimated components from BSM

That is,
σ̂η2 = 0.00077185, σ̂ζ2 = 0, 2
σ̂ω = 0.0013969, σ̂ε2 = 0

Notice that, since σ̂ζ2 = 0, the estimate for βt is constant and the level component is simply a
random walk with a drift.

34.5 Interacting with R from the command line

Up to this point we have spoken only of interaction with R via the GUI program. In order to do the
same from the command line interface, gretl provides the foreign command. This enables you to
embed non-native commands within a gretl script.
A “foreign” block takes the form

foreign language=R [--send-data] [--quiet]

... R commands ...
end foreign

and achieves the same effect as submitting the enclosed R commands via the GUI in the non-
interactive mode (see section 34.3 above). The --send-data option arranges for auto-loading of
the data present in the gretl session. The --quiet option prevents the output from R from being
echoed in the gretl output.
Using this method, replicating the example in the previous subsection is rather easy: basically, all it
takes is encapsulating the content of the R script in a foreign. . . end foreign block; see example
34.1.
The above syntax, despite being already quite useful by itself, shows its full power when it is used
in conjunction with user-written functions. Example 34.2 shows how to define a gretl function that
calls R internally.
Chapter 34. Gretl and R 290

Example 34.1: Estimation of the Basic Structural Model — simple

open bjg.gdt

foreign language=R --send-data

y <- gretldata[, "lg"]
strmod <- StructTS(y)
compon <- as.ts(tsSmooth(strmod))
vars <- as.matrix(strmod$coef)

gretl.export(compon)
gretl.export(vars)
end foreign

append @dotdir/compon.csv
rename level lg_level
rename slope lg_slope
rename sea lg_seas

vars = mread("@dotdir/vars.mat")

Example 34.2: Estimation of the Basic Structural Model — via a function

function list RStructTS(series myseries)

smpl ok(myseries) --restrict

sx = argname(myseries)

foreign language=R --send-data --quiet

@sx <- gretldata[, "myseries"]
strmod <- StructTS(@sx)
compon <- as.ts(tsSmooth(strmod))
gretl.export(compon)
end foreign

append @dotdir/compon.csv
rename level @sx_level
rename slope @sx_slope
rename sea @sx_seas

list ret = @sx_level @sx_slope @sx_seas

return ret
end function

# ------------ main -------------------------

open bjg.gdt
list X = RStructTS(lg)
Chapter 34. Gretl and R 291

34.6 Performance issues with R

R is a large and complex program, which takes an appreciable time to initialize itself.5 In interactive
use this not a significant problem, but if you have a gretl script that calls R repeatedly the cumulated
start-up costs can become bothersome. To get around this, gretl calls the R shared library by
preference; in this case the start-up cost is borne only once, on the first invocation of R code from
within gretl.
Support for the R shared library is built into the gretl packages for MS Windows and OS X — but
the advantage is realized only if the library is in fact available at run time. If you are building gretl
yourself on Linux and wish to make use of the R library, you should ensure (a) that R has been
built with the shared library enabled (specify --enable-R-shlib when configuring your build of
R), and (b) that the pkg-config program is able to detect your R installation. We do not link to the
R library at build time, rather we open it dynamically on demand. The gretl GUI has an item under
the Tools/Preferences menu which enables you to select the path to the library, if it is not detected
automatically.
If you have the R shared library installed but want to force gretl to call the R executable instead,
you can do

set R_lib off

34.7 Further use of the R library

Besides improving performance, as noted above, use of the R shared library makes possible a
further refinement. That is, you can define functions in R, within a foreign block, then call those
functions later in your script much as if they were gretl functions. This is illustrated below.

set R_functions on
foreign language=R
plus_one <- function(q) {
z = q+1
invisible(z)
}
end foreign

scalar b=R.plus_one(2)

The R function plus_one is obviously trivial in itself, but the example shows a couple of points.
First, for this mechanism to work you need to enable R_functions via the set command. Second,
to avoid collision with the gretl function namespace, calls to functions defined in this way must be
prefixed with “R.”, as in R.plus_one.
Built-in R functions may also be called in this way, once R_functions is set on. For example one
can invoke R’s choose function, which computes binomial coefficients:

set R_functions on
scalar b=R.choose(10,4)

Note, however, that the possibilities for use of built-in R functions are limited; only functions whose
arguments and return values are sufficiently generic (basically scalars or matrices) will work.

5 About one third of a second on an Intel Core Duo machine of 2009 vintage.
 Chapter 35

Gretl and Ox

35.1 Introduction
Ox, written by Jurgen A. Doornik (see Doornik, 2007), is described by its author as “an object-
oriented statistical system. At its core is a powerful matrix language, which is complemented by
a comprehensive statistical library. Among the special features of Ox are its speed [and] well-
designed syntax. . . . Ox comes in two versions: Ox Professional and Ox Console. Ox is available for
Windows, Linux, Mac (OS X), and several Unix platforms.” (www.doornik.com)
Ox is proprietary, closed-source software. The command-line version of the program is, however,
available free of change for academic users. Quoting again from Doornik’s website: “The Console
(command line) versions may be used freely for academic research and teaching purposes only. . . .
The Ox syntax is public, and, of course, you may do with your own Ox code whatever you wish.”
If you wish to use Ox in conjunction with gretl please refer to doornik.com for further details on
licensing.
As the reader will no doubt have noticed, all the other software that we discuss in this Guide is
open-source and freely available for all users. We make an exception for Ox on the grounds that it is
indeed fast and well designed, and that its statistical library — along with various add-on packages
that are also available — has exceptional coverage of cutting-edge techniques in econometrics.
The gretl authors have used Ox for benchmarking some of gretl’s more advanced features such as
dynamic panel models and the state space models.1

35.2 Ox support in gretl

The support offered for Ox in gretl is similar to that offered for R, as discussed in chapter 34, but
with a few differences. The first difference to note is that Ox support is not on by default; it must
be enabled explicitly.

+ To enable support for Ox, go to the Tools/Preferences/General menu item and check the box labeled
“Enable Ox support”. Click “OK” in the preferences dialog, then quit and restart gretl. You will now find,
under the Programs tab in the Tools/Preferences/General dialog, an entry for specifying the path to the oxl
executable, that is, the program that runs Ox files (on MS Windows it is called oxl.exe). Make sure that path
is right, and you’re ready to go.
With support enabled, you can open and edit Ox programs in the gretl GUI. Clicking the “execute”
icon in the editor window will send your code to Ox for execution. Figures 35.1 and Figure 35.2
show an Ox program and part of its output.
In addition you can embed Ox code within a gretl script using a foreign block, as described in
connection with R. A trivial example, which simply prints the gretl data matrix within Ox, is shown
below:

open data4-1
matrix m = { dataset }
mwrite(m, "@dotdir/gretl.mat")

1 For a review of Ox, see Cribari-Neto and Zarkos (2003) and for a (somewhat dated) comparison of Ox with other

matrix-oriented packages such as GAUSS, see Steinhaus (1999).

292
Chapter 35. Gretl and Ox 293

Figure 35.1: Ox editing window

Figure 35.2: Output from Ox

Chapter 35. Gretl and Ox 294

foreign language=Ox
#include <oxstd.h>
main()
{
decl gmat = gretl_loadmat("gretl.mat");
print(gmat);
}
end foreign

The above example illustrates how a matrix can be passed from gretl to Ox. We use the mwrite
function to write a matrix into the user’s “dotdir” (see section 12.2), then in Ox we use the function
gretl_loadmat to retrieve the matrix.
How does gretl_loadmat come to be defined? When gretl writes out the Ox program correspond-
ing to your foreign block it does two things in addition. First, it writes a small utility file named
gretl_io.ox into your dotdir. This contains a definition for gretl_loadmat and also for the
function gretl_export (see below). Second, gretl interpolates into your Ox code a line which in-
cludes this utility file (it is inserted right after the inclusion of oxstd.h, which is needed in all Ox
programs). Note that gretl_loadmat expects to find the named file in the user’s dotdir.

35.3 Illustration: replication of DPD model

Example 35.1 shows a more ambitious case. This script replicates one of the dynamic panel data
models in Arellano and Bond (1991), first using gretl and then using Ox; we then check the relative
differences between the parameter estimates produced by the two programs (which turn out to be
reassuringly small).
Unlike the previous example, in this case we pass the dataset from gretl to Ox as a CSV file in
order to preserve the variable names. Note the use of the internal variable csv_na to get the right
representation of missing values for use with Ox — and also note that the --send-data option for
the foreign command is not available in connection with Ox.
We get the parameter estimates back from Ox using gretl_export on the Ox side and mread on
the gretl side. The gretl_export function takes two arguments, a matrix and a file name. The file
is written into the user’s dotdir, from where it can be picked up using mread. The final portion of
the output from Example 35.1 is shown below:

? matrix oxparm = mread("/home/cottrell/.gretl/oxparm.mat")

Generated matrix oxparm
? eval abs((parm - oxparm) ./ oxparm)
1.4578e-13
3.5642e-13
5.0672e-15
1.6091e-13
8.9808e-15
2.0450e-14
1.0218e-13
2.1048e-13
9.5898e-15
1.8658e-14
2.1852e-14
2.9451e-13
1.9398e-13
Chapter 35. Gretl and Ox 295

Example 35.1: Estimation of dynamic panel data model via gretl and Ox

open abdata.gdt

# Take first differences of the independent variables

genr Dw = diff(w)
genr Dk = diff(k)
genr Dys = diff(ys)

# 1-step GMM estimation

arbond 2 ; n Dw Dw(-1) Dk Dys Dys(-1) 0 --time-dummies
matrix parm = $coeff

# Write CSV file for Ox

set csv_na .NaN
store @dotdir/abdata.csv

# Replicate using the Ox DPD package

foreign language=Ox
#include <oxstd.h>
#import <packages/dpd/dpd>

main ()
{
decl dpd = new DPD();
dpd.Load("@dotdir/abdata.csv");
dpd.SetYear("YEAR");

dpd.Select(Y_VAR, {"n", 0, 2});

dpd.Select(X_VAR, {"w", 0, 1, "k", 0, 0, "ys", 0, 1});
dpd.Select(I_VAR, {"w", 0, 1, "k", 0, 0, "ys", 0, 1});

dpd.Gmm("n", 2, 99); // GMM-type instrument

dpd.SetDummies(D_CONSTANT + D_TIME);
dpd.SetTest(2, 2); // Sargan, AR 1-2 tests
dpd.Estimate(); // 1-step estimation
decl parm = dpd.GetPar();
gretl_export(parm, "oxparm.mat");

delete dpd;
}
end foreign

# Compare the results

matrix oxparm = mread("@dotdir/oxparm.mat")
eval abs((parm - oxparm) ./ oxparm)
 Chapter 36

Gretl and Octave

36.1 Introduction
GNU Octave, written by John W. Eaton and others, is described as “a high-level language, primar-
ily intended for numerical computations.” The program is oriented towards “solving linear and
nonlinear problems numerically” and “performing other numerical experiments using a language
that is mostly compatible with Matlab.” (www.gnu.org/software/octave) Octave is available in
source-code form (naturally, for GNU software) and also in the form of binary packages for MS Win-
dows and Mac OS X. Numerous contributed packages that extend Octave’s functionality in various
ways can be found at octave.sf.net.

36.2 Octave support in gretl

The support offered for Octave in gretl is similar to that offered for R (chapter 34). For example,
you can open and edit Octave scripts in the gretl GUI. Clicking the “execute” icon in the editor
window will send your code to Octave for execution. Figures 36.1 and Figure 36.2 show an Octave
script and its output; in this example we use the function logistic_regression to replicate some
results from Greene (2000).
In addition you can embed Octave code within a gretl script using a foreign block, as described
in connection with R. A trivial example, which simply loads and prints the gretl data matrix within
Octave, is shown below. (Note that in Octave, appending “;” to a line suppresses verbose output;
leaving off the semicolon results in printing of the object that is produced, if any.)

open data4-1
matrix m = { dataset }
mwrite(m, "@dotdir/gretl.mat")

foreign language=Octave
gmat = gretl_loadmat("gretl.mat")
end foreign

We use the mwrite function to write a matrix into the user’s “dotdir” (see section 12.2), then in Oc-
tave we use the function gretl_loadmat to retrieve the matrix. The “magic” behind gretl_loadmat
works in essentially the same way as for Ox (chapter 35).

36.3 Illustration: spectral methods

We now present a more ambitious example which exploits Octave’s handling of the frequency
domain (and also its ability to use code written for MATLAB), namely estimation of the spec-
tral coherence of two time series. For this illustration we require two extra Octave packages
from octave.sf.net, namely those supporting spectral functions (specfun) and signal process-
ing (signal). After downloading the packages you can install them from within Octave as follows
(using version numbers as of March 2010):

pkg install specfun-1.0.8.tar.gz

pkg install signal-1.0.10.tar.gz

296
Chapter 36. Gretl and Octave 297

Figure 36.1: Octave editing window

Figure 36.2: Output from Octave

Chapter 36. Gretl and Octave 298

In addition we need some specialized MATLAB files made available by Mario Forni of the Uni-
versity of Modena, at http://www.economia.unimore.it/forni_mario/matlab.htm. The files
needed are coheren2.m, coheren.m, coher.m, cospec.m, crosscov.m, crosspec.m, crosspe.m
and spec.m. These are in a form appropriate for MS Windows. On Linux you could run the follow-
ing shell script to get the files and remove the Windows end-of-file character (which prevents the
files from running under Octave):

SITE=http://www.economia.unimore.it/forni_mario/MYPROG
# download files and delete trailing Ctrl-Z
for f in \
coheren2.m \
coheren.m \
coher.m \
cospec.m \
crosscov.m \
crosspec.m \
crosspe.m \
spec.m ; do
wget $SITE/$f && \
cat $f | tr -d \\032 > tmp.m && mv tmp.m $f
done

The Forni files should be placed in some appropriate directory, and you should tell Octave where
to find them by adding that directory to Octave’s loadpath. On Linux this can be done via an entry
in one’s ~/.octaverc file. For example

addpath("~/stats/octave/forni");

Alternatively, an addpath directive can be written into the Octave script that calls on these files.
With everything set up on the Octave side we now write a gretl script (see Example 36.1) which
opens a time-series dataset, constructs and writes a matrix containing two series, and defines a
foreign block containing the Octave statements needed to produce the spectral coherence matrix.
The matrix is exported via the gretl_export function, which is automatically defined for you; this
function takes two arguments, a matrix and a file name. The file is written into the user’s “dotdir”,
from where it can be picked up using mread. Finally, we produce a graph from the matrix in gretl.
In the script this is sent to the screen; Figure 36.3 shows the same graph in PDF format.
Chapter 36. Gretl and Octave 299

Example 36.1: Estimation of spectral coherence via Octave

open data9-7
matrix xy = { PRIME, UNEMP }
mwrite(xy, "@dotdir/xy.mat")

foreign language=Octave
# uncomment and modify the following if necessary
# addpath("~/stats/octave/forni");
xy = gretl_loadmat("xy.mat");
x = xy(:,1);
y = xy(:,2);
# note: the last parameter is the Bartlett window size
h = coher(x, y, 8);
gretl_export(h, "h.mat");
end foreign

h = mread("@dotdir/h.mat")
colnames(h, "coherence")
gnuplot 1 --time-series --with-lines --matrix=h --output=display

0.4

0.3

0.2

0.1
coherence

-0.1

-0.2

-0.3

-0.4

-0.5
0 10 20 30 40 50 60

Figure 36.3: Spectral coherence estimated via Octave

 Chapter 37

Gretl and Stata

Stata (www.stata.com) is closed-source, proprietary (and expensive) software and as such is not a
natural companion to gretl. Nonetheless, given Stata’s popularity it is desirable to have a convenient
way of comparing results across the two programs, and to that end we provide limited support for
Stata code under the foreign command.
The following example illustrates what’s available. You can send the current gretl dataset to Stata
using the --send-data flag. And having defined a matrix within Stata you can export it for use with
gretl via the gretl_export command: this takes two arguments, the name of the matrix to export
and the filename to use; the file is written to the user’s “dotdir”, from where it can be retrieved
using the mread() function.1 To suppress printed output from Stata you can add the --quiet flag
to the foreign block.

Example 37.1: Comparison of clustered standard errors with Stata

function matrix stata_reorder (matrix se)

# stata puts the intercept last, but gretl puts it first
scalar n = rows(se)
return se[n] | se[1:n-1]
end function

open data4-1
ols 1 0 2 3 --cluster=bedrms
matrix se = $stderr

foreign language=stata --send-data

regress price sqft bedrms, vce(cluster bedrms)
matrix vcv = e(V)
gretl_export vcv "vcv.mat"
end foreign

matrix stata_vcv = mread("@dotdir/vcv.mat")

stata_se = stata_reorder(sqrt(diag(stata_vcv)))
matrix check = se - stata_se
print check

Note that there is no support for editing Stata scripts via the gretl GUI. Neither is there a way of
specifying the path to the stata executable in the gretl GUI; the executable must be in your PATH.
Also note that Stata coerces all variable names to lower-case on data input, so even if series names
in gretl are upper-case, or of mixed case, it’s necessary to use all lower-case in Stata.

1 We do not currently offer the complementary functionality of gretl_loadmat, which enables reading of matrices

written by gretl’s mwrite() function in Ox and Octave. This is not at all easy to implement in Stata code.

300
 Chapter 38

Troubleshooting gretl

38.1 Bug reports

Bug reports are welcome — well, if not exactly welcome then useful and appreciated. Hopefully,
you are unlikely to find bugs in the actual calculations done by gretl (although this statement
does not constitute any sort of warranty). You may, however, come across bugs or oddities in the
behavior of the graphical interface. Please remember that the usefulness of bug reports is greatly
enhanced if you can be as specific as possible: what exactly went wrong, under what conditions,
and on what operating system? If you saw an error message, what precisely did it say?
One way of making a bug report more useful is to run the program in such a way that you can see
(and copy) any additional information that gets printed to the stderr output stream. On Linux and
Mac OS X that’s just a matter of launching gretl from the command prompt in a terminal window.
On MS Windows it’s a bit more complicated since stderr is by default “invisble.” However, you
can quite easily set up a special gretl shortcut that does the job. On the Windows desktop, right-
click and select “New shortcut.” In the dialog box that appears, browse to find gretlw32.exe and
append the --debug flag, as shown in Figure 38.1. Note that there are two dashes before “debug”.

Figure 38.1: Creating a debugging shortcut

301
Chapter 38. Troubleshooting gretl 302

When you start gretl in this mode, a “console window” appears as well as the gretl window, and
stderr output goes to the console. To copy this output, click at the top left of the console window
for a menu (Figure 38.2): first do “Select all”, then “Copy.” You can paste the results into Notepad
or similar.

Figure 38.2: The program with console window

38.2 Auxiliary programs

As mentioned above, gretl calls some other programs to accomplish certain tasks (gnuplot for
graphing, LATEX for high-quality typesetting of regression output, GNU R). If something goes wrong
with such external links, it is not always easy for gretl to produce an informative error message.
If such a link fails when accessed from the gretl graphical interface, you may be able to get more
information by starting gretl from the command prompt rather than via a desktop menu entry or
icon. On the X window system, start gretl from the shell prompt in an xterm; on MS Windows, start
the program gretlw32.exe from a console window or “DOS box” using the -g or --debug option
flag. Additional error messages may be displayed on the terminal window.
Also please note that for most external calls, gretl assumes that the programs in question are
available in your “path” — that is, that they can be invoked simply via the name of the program,
without supplying the program’s full location.1 Thus if a given program fails, try the experiment of
typing the program name at the command prompt, as shown below.

Graphing Typesetting GNU R

X window system gnuplot pdflatex R
MS Windows wgnuplot.exe pdflatex RGui.exe

If the program fails to start from the prompt, it’s not a gretl issue but rather that the program’s
home directory is not in your path, or the program is not installed (properly). For details on
modifying your path please see the documentation or online help for your operating system or
shell.
1 The exception to this rule is the invocation of gnuplot under MS Windows, where a full path to the program is given.
 Chapter 39

The command line interface

The gretl package includes the command-line program gretlcli. On Linux it can be run from a
terminal window (xterm, rxvt, or similar), or at the text console. Under MS Windows it can be run in
a console window (sometimes inaccurately called a “DOS box”). gretlcli has its own help file, which
may be accessed by typing “help” at the prompt. It can be run in batch mode, sending output
directly to a file (see also the Gretl Command Reference).
If gretlcli is linked to the readline library (this is automatically the case in the MS Windows version;
also see Appendix C), the command line is recallable and editable, and offers command completion.
You can use the Up and Down arrow keys to cycle through previously typed commands. On a given
command line, you can use the arrow keys to move around, in conjunction with Emacs editing
keystrokes.1 The most common of these are:

Keystroke Effect
Ctrl-a go to start of line
Ctrl-e go to end of line
Ctrl-d delete character to right

where “Ctrl-a” means press the “a” key while the “Ctrl” key is also depressed. Thus if you want
to change something at the beginning of a command, you don’t have to backspace over the whole
line, erasing as you go. Just hop to the start and add or delete characters. If you type the first
letters of a command name then press the Tab key, readline will attempt to complete the command
name for you. If there’s a unique completion it will be put in place automatically. If there’s more
than one completion, pressing Tab a second time brings up a list.
Probably the most useful mode for heavy-duty work with gretlcli is batch (non-interactive) mode,
in which the program reads and processes a script, and sends the output to file. For example

gretlcli -b scriptfile > outputfile

Note that scriptfile is treated as a program argument; only the output file requires redirection (>).
Don’t forget the -b (batch) switch, otherwise the program will wait for user input after executing
the script (and if output is redirected, the program will appear to “hang”).

1 Actually, the key bindings shown below are only the defaults; they can be customized. See the readline manual.

303
 Part IV

Appendices

304
 Appendix A

Data file details

A.1 Basic native format

In gretl’s native data format, a data set is stored in XML (extensible mark-up language). Data
files correspond to the simple DTD (document type definition) given in gretldata.dtd, which is
supplied with the gretl distribution and is installed in the system data directory (e.g. /usr/share/
gretl/data on Linux.) Data files may be plain text or gzipped. They contain the actual data values
plus additional information such as the names and descriptions of variables, the frequency of the
data, and so on.
Most users will probably not have need to read or write such files other than via gretl itself, but
if you want to manipulate them using other software tools you should examine the DTD and also
take a look at a few of the supplied practice data files: data4-1.gdt gives a simple example;
data4-10.gdt is an example where observation labels are included.

A.2 Traditional ESL format

For backward compatibility, gretl can also handle data files in the “traditional” format inherited
from Ramu Ramanathan’s ESL program. In this format a data set is represented by two text files;
one contains the actual data and the other information on how the data should be read. To be more
specific:

1. Actual data: A rectangular matrix of white-space separated numbers. By default, each column
represents a variable, each row an observation. The data columns can be separated by spaces
or tabs. Traditionally the data filename has no extension/suffix.

2. Header: The data file must be accompanied by a header file which has the same basename as
the data file plus the suffix .hdr. This file contains, in order:

• (Optional) comments on the data, set off by the opening string (* and the closing string
*), each of these strings to occur on lines by themselves.
• (Required) a list of the names of the variables in the data file, separated by white space.
Names are limited to 8 characters, must start with a letter, and are limited to alphanu-
meric characters plus the underscore. The list may continue over more than one line; it
should be terminated with a semicolon.
• (Required) an observations line of the form 1 1 85. The first element gives the data
frequency (1 for undated or annual data, 4 for quarterly, 12 for monthly). The second
and third elements give the starting and ending observations. These should be 1 and the
number of observations, respectively, for undated data. For time-series data one can use
dates of the form 1959.1 (quarterly, one digit after the point) or 1967.03 (monthly, two
digits after the point).
• The keyword BYOBS (but see below).

Here is an example of a well-formed data header file; the corresponding data file contains three
columns of data, each having 90 entries.

305
Appendix A. Data file details 306

(*
DATA9-6:
Data on log(money), log(income) and interest rate from US.
Source: Stock and Watson (1993) Econometrica
(unsmoothed data) Period is 1900-1989 (annual data).
Data compiled by Graham Elliott.
*)
lmoney lincome intrate ;
1 1900 1989 BYOBS

Three further features of the traditional ESL data format may be noted.

1. If the BYOBS keyword is replaced by BYVAR this indicates that in the corresponding data file
the data are written out by variable rather than by observation.

2. If BYOBS is followed by the keyword MARKERS, gretl expects a data file in which the first column
contains strings (8 characters maximum) used to identify the observations. This may be useful
in the case of cross-sectional data where the units of observation are identifiable: countries,
states, cities or whatever. It can also be useful for irregular time series data, such as daily
stock price data where some days are not trading days — in this case the observations can
be marked with a date string such as 10/01/98. (Remember the 8-character maximum.) Note
that BYVAR and MARKERS are mutually exclusive flags. Also note that the “markers” are not
considered to be a variable: this column does not have a corresponding entry in the list of
variable names in the header file.

3. If a file with the same base name as the data file and header files, but with the suffix .lbl, is
found, it is read to fill out the descriptive labels for the data series. The format of the label file
is simple: each line contains the name of one variable (as found in the header file), followed
by one or more spaces, followed by the descriptive label. Here is an example, giving a label
for a variable named “price”: price New car price index, 1982 base year

If you want to save data in traditional format, use the --traditional flag with the store com-
mand, either in the command-line program or in the console window of the GUI program.

A.3 Binary database details

A gretl database consists of two parts: an ASCII index file (with filename suffix .idx) containing
information on the series, and a binary file (suffix .bin) containing the actual data. Two examples
of the format for an entry in the idx file are shown below:

G0M910 Composite index of 11 leading indicators (1987=100)

M 1948.01 - 1995.11 n = 575
currbal Balance of Payments: Balance on Current Account; SA
Q 1960.1 - 1999.4 n = 160

The first field is the series name. The second is a description of the series (maximum 128 charac-
ters). On the second line the first field is a frequency code: M for monthly, Q for quarterly, A for
annual, B for business-daily (daily with five days per week) and D for daily (seven days per week).
No other frequencies are accepted at present. Then comes the starting date (N.B. with two digits
following the point for monthly data, one for quarterly data, none for annual), a space, a hyphen,
another space, the ending date, the string “n = ” and the integer number of observations. In the
case of daily data the starting and ending dates should be given in the form YYYY/MM/DD. This
format must be respected exactly.
Optionally, the first line of the index file may contain a short comment (up to 64 characters) on the
source and nature of the data, following a hash mark. For example:
Appendix A. Data file details 307

# Federal Reserve Board (interest rates)

The corresponding binary database file holds the data values, represented as “floats”, that is, single-
precision floating-point numbers, typically taking four bytes apiece. The numbers are packed “by
variable”, so that the first n numbers are the observations of variable 1, the next m the observations
on variable 2, and so on.
 Appendix B

Data import via ODBC

Since version 1.7.5, gretl provides a method for retrieving data from databases which support the
Open Database Connectivity (ODBC) standard. Most users won’t be interested in this, but there may
be some for whom this feature matters a lot — typically, those who work in an environment where
huge data collections are accessible via a Data Base Management System (DBMS).
In the following section we explain what is needed for ODBC support in gretl. We provide some
background information on how ODBC works in section B.2, and explain the details of getting gretl
to retrieve data from a database in section B.3.

B.1 ODBC support

The piece of software that bridges between gretl and the ODBC system is a dynamically loaded
“plugin”. This is included in the gretl packages for MS Windows and Mac OS X (on OS X support
was added in gretl 1.9.0). On other unix-type platforms (notably Linux) you will have to build gretl
from source to get ODBC support. This is because the gretl plugin depends on having unixODBC
installed, which we cannot assume to be the case on typical Linux systems. To enable the ODBC
plugin when building gretl, you must pass the option --with-odbc to gretl’s configure script. In
addition, if unixODBC is installed in a non-standard location you will have to specify its installation
prefix using --with-ODBC-prefix, as in (for example)

./configure --with-odbc --with-ODBC-prefix=/opt/ODBC

B.2 ODBC base concepts

ODBC is short for Open DataBase Connectivity, a group of software methods that enable a client to
interact with a database server. The most common operation is when the client fetches some data
from the server. ODBC acts as an intermediate layer between client and server, so the client “talks”
to ODBC rather than accessing the server directly (see Figure B.1).

ODBC
query

data

Figure B.1: Retrieving data via ODBC

For the above mechanism to work, it is necessary that the relevant ODBC software is installed
and working on the client machine (contact your DB administrator for details). At this point, the
database (or databases) that the server provides will be accessible to the client as a data source
with a specific identifier (a Data Source Name or DSN); in most cases, a username and a password
are required to connect to the data source.
Once the connection is established, the user sends a query to ODBC, which contacts the database
manager, collects the results and sends them back to the user. The query is almost invariably

308
Appendix B. Data import via ODBC 309

formulated in a special language used for the purpose, namely SQL.1 We will not provide here an
SQL tutorial: there are many such tutorials on the Net; besides, each database manager tends to
support its own SQL dialect so the precise form of an SQL query may vary slightly if the DBMS on
the other end is Oracle, MySQL, PostgreSQL or something else.
Suffice it to say that the main statement for retrieving data is the SELECT statement. Within a DBMS,
data are organized in tables, which are roughly equivalent to spreadsheets. The SELECT statement
returns a subset of a table, which is itself a table. For example, imagine that the database holds a
table called “NatAccounts”, containing the data shown in Table B.1.

year qtr gdp consump tradebal

1970 1 584763 344746.9 −5891.01
1970 2 597746 350176.9 −7068.71
1970 3 604270 355249.7 −8379.27
1970 4 609706 361794.7 −7917.61
1971 1 609597 362490 −6274.3
1971 2 617002 368313.6 −6658.76
1971 3 625536 372605 −4795.89
1971 4 630047 377033.9 −6498.13

Table B.1: The “NatAccounts” table

The SQL statement

SELECT qtr, tradebal, gdp FROM NatAccounts WHERE year=1970;

produces the subset of the original data shown in Table B.2.

qtr tradebal gdp

1 −5891.01 584763
2 −7068.71 597746
3 −8379.27 604270
4 −7917.61 609706

Table B.2: Result of a SELECT statement

Gretl provides a mechanism for forwarding your query to the DBMS via ODBC and including the
results in your currently open dataset.

B.3 Syntax
At present gretl does not offer a graphical interface for ODBC import; this must be done via the
command line interface. The two commands used for fetching data via an ODBC connection are
open and data.
The open command is used for connecting to a DBMS: its syntax is

open dsn=database [user=username] [password=password] --odbc

The user and password items are optional; the effect of this command is to initiate an ODBC
connection. It is assumed that the machine gretl runs on has a working ODBC client installed.
In order to actually retrieve the data, the data command is used. Its syntax is:
1 See http://en.wikipedia.org/wiki/SQL.
Appendix B. Data import via ODBC 310

data series [obs-format=format-string] query=query-string --odbc

where:

series is a list of names of gretl series to contain the incoming data, separated by spaces. Note that
these series need not exist pior to the ODBC import.
format-string is an optional parameter, used to handle cases when a “rectangular” organisation of
the database cannot be assumed (more on this later);
query-string is a string containing the SQL statement used to extract the data.2

There should be no spaces around the equals signs in the obs-format and query fields in the data
command.
The query-string can, in principle, contain any valid SQL statement which results in a table. This
string may be specified directly within the command, as in

data x query="SELECT foo FROM bar" --odbc

which will store into the gretl variable x the content of the column foo from the table bar. However,
since in a real-life situation the string containing the SQL statement may be rather long, it may be
best to store it in a string variable. For example:

string SqlQry = "SELECT foo1, foo2 FROM bar"

data x y query=SqlQry --odbc

The observation format specifier

If the optional parameter obs-format is absent, as in the above example, the SQL query should
return k columns of data, where k is the number of series names listed in the data command.
It may be necessary to include a smpl command before the data command to set up the right
“window” for the incoming data. In addition, if one cannot assume that the data will be delivered
in the correct order (typically, chronological order), the SQL query should contain an appropriate
ORDER BY clause.
The optional format string is used for those cases when there is no certainty that the data from the
query will arrive in the same order as the gretl dataset. This may happen when missing values are
interspersed within a column, or with data that do not have a natural ordering, e.g. cross-sectional
data. In this case, the SQL statement should return a table with m + k columns, where the first m
columns are used to identify the observation or row in the gretl dataset into which the actual data
values in the final k columns should be placed. The obs-format string is used to translate the first
m fields into a string which matches the string gretl uses to identify observations in the currently
open dataset. Up to three columns can be used for this purpose (m ≤ 3).
Note that the strings gretl uses to identify observations can be seen by printing any variable “by
observation”, as in

print index --byobs

(The series named index is automatically added to a dataset created via the nulldata command.)
The format specifiers available for use with obs-format are as follows:

%d print an integer value

%s print an string value
%g print a floating-point value
2 Prior to gretl 1.8.8, the tag “query=” was not required (or accepted) before the query string, and only one series could

be imported at a time. This variant is still accepted for the sake of backward compatibility.
Appendix B. Data import via ODBC 311

In addition the format can include literal characters to be passed through, such as slashes or colons,
to make the resulting string compatible with gretl’s observation identifiers.
For example, consider the following fictitious case: we have a 5-days-per-week dataset, to which we
want to add the stock index for the Verdurian market;3 it so happens that in Verduria Saturdays
are working days but Wednesdays are not. We want a column which does not contain data on
Saturdays, because we wouldn’t know where to put them, but at the same time we want to place
missing values on all the Wednesdays.
In this case, the following syntax could be used

string QRY="SELECT year,month,day,VerdSE FROM AlmeaIndexes"

data y obs-format="%d/%d/%d" query=QRY --odbc

The column VerdSE holds the data to be fetched, which will go into the gretl series y. The first
three columns are used to construct a string which identifies the day. Daily dates take the form
YYYY/MM/DD in gretl. If a row from the DBMS produces the observation string 2008/04/01 this will
match OK (it’s a Tuesday), but 2008/04/05 will not match since it is a Saturday; the corresponding
row will therefore be discarded. On the other hand, since no string 2008/04/23 will be found in
the data coming from the DBMS (it’s a Wednesday), that entry is left blank in our series y.

B.4 Examples

Table Consump Table DATA

Field Type
Field Type
year decimal(4,0)
time decimal(7,2)
qtr decimal(1,0)
income decimal(16,6)
varname varchar(16)
consump decimal(16,6)
xval decimal(20,10)

Table B.3: Example AWM database – structure

Table Consump Table DATA

1970 1 CAN −517.9085000000
1970 2 CAN 662.5996000000
1970.00 424278.975500 344746.944000
1970 3 CAN 1130.4155000000
1970.25 433218.709400 350176.890400
1970 4 CAN 467.2508000000
1970.50 440954.219100 355249.672300
1970 1 COMPR 18.4000000000
1970.75 446278.664700 361794.719900
1970 2 COMPR 18.6341000000
1971.00 447752.681800 362489.970500
1970 3 COMPR 18.3000000000
1971.25 453553.860100 368313.558500
1970 4 COMPR 18.2663000000
1971.50 460115.133100 372605.015300
1970 1 D1 1.0000000000
...
1970 2 D1 0.0000000000
...

Table B.4: Example AWM database — data

In the following examples, we will assume that access is available to a database known to ODBC
with the data source name “AWM”, with username “Otto” and password “Bingo”. The database
“AWM” contains quarterly data in two tables (see B.3 and B.4):
3 See http://www.almeopedia.com/index.php/Verduria.
Appendix B. Data import via ODBC 312

The table Consump is the classic “rectangular” dataset; that is, its internal organization is the same
as in a spreadsheet or econometrics package: each row is a data point and each column is a variable.
The structure of the DATA table is different: each record is one figure, stored in the column xval,
and the other fields keep track of which variable it belongs to, for which date.

Example B.1: Simple query from a rectangular table

nulldata 160
setobs 4 1970:1 --time
open dsn=AWM user=Otto password=Bingo --odbc

string Qry = "SELECT consump, income FROM Consump"

data cons inc query=Qry --odbc

Example B.1 shows a query for two series: first we set up an empty quarterly dataset. Then we
connect to the database using the open statement. Once the connection is established we retrieve
two columns from the Consump table. No observation string is required because the data already
have a suitable structure; we need only import the relevant columns.

Example B.2: Simple query from a non-rectangular table

string S = "select year, qtr, xval from DATA \

where varname=’WLN’ ORDER BY year, qtr"
data wln obs-format="%d:%d" query=S --odbc

In example B.2, by contrast, we make use of the observation string since we are drawing from the
DATA table, which is not rectangular. The SQL statement stored in the string S produces a table with
three columns. The ORDER BY clause ensures that the rows will be in chronological order, although
this is not strictly necessary in this case.
Appendix B. Data import via ODBC 313

Example B.3: Handling of missing values for a non-rectangular table

string foo = "select year, qtr, xval from DATA \

where varname=’STN’ AND qtr>1"
data bar obs-format="%d:%d" query=foo --odbc
print bar --byobs

Example B.3 shows what happens if the rows in the outcome from the SELECT statement do not
match the observations in the currently open gretl dataset. The query includes a condition which
filters out all the data from the first quarter. The query result (invisible to the user) would be
something like
+------+------+---------------+
| year | qtr | xval |
+------+------+---------------+
| 1970 | 2 | 7.8705000000 |
| 1970 | 3 | 7.5600000000 |
| 1970 | 4 | 7.1892000000 |
| 1971 | 2 | 5.8679000000 |
| 1971 | 3 | 6.2442000000 |
| 1971 | 4 | 5.9811000000 |
| 1972 | 2 | 4.6883000000 |
| 1972 | 3 | 4.6302000000 |
...

Internally, gretl fills the variable bar with the corresponding value if it finds a match; otherwise, NA
is used. Printing out the variable bar thus produces
Obs bar

1970:1
1970:2 7.8705
1970:3 7.5600
1970:4 7.1892
1971:1
1971:2 5.8679
1971:3 6.2442
1971:4 5.9811
1972:1
1972:2 4.6883
1972:3 4.6302
...
 Appendix C

Building gretl

C.1 Requirements
Gretl is written in the C programming language, abiding as far as possible by the ISO/ANSI C
Standard (C90) although the graphical user interface and some other components necessarily make
use of platform-specific extensions.
The program was developed under Linux. The shared library and command-line client should
compile and run on any platform that supports ISO/ANSI C and has the libraries listed in Table C.1.
If the GNU readline library is found on the host system this will be used for gretcli, providing a
much enhanced editable command line. See the readline homepage.

Library purpose website

zlib data compression info-zip.org
libxml2 XML manipulation xmlsoft.org
LAPACK linear algebra netlib.org
FFTW3 Fast Fourier Transform fftw.org
glib-2.0 Numerous utilities gtk.org

Table C.1: Libraries required for building gretl

The graphical client program should compile and run on any system that, in addition to the above
requirements, offers GTK version 2.4.0 or higher (see gtk.org).1
Gretl calls gnuplot for graphing. You can find gnuplot at gnuplot.info. As of this writing the most
recent official release is 4.2.6 (of September, 2009). The gretl packages for MS Windows and Mac OS
X come with current CVS gnuplot (version 4.5), and the gretl website offers information on building
or installing gnuplot 4.5 on Linux.
Some features of gretl make use of portions of Adrian Feguin’s gtkextra library. The relevant parts
of this package are included (in slightly modified form) with the gretl source distribution.
A binary version of the program is available for the Microsoft Windows platform (Windows 2000
or higher). This version was cross-compiled under Linux using mingw (the GNU C compiler, gcc,
ported for use with win32) and linked against the Microsoft C library, msvcrt.dll. The (free,
open-source) Windows installer program is courtesy of Jordan Russell (jrsoftware.org).

C.2 Build instructions: a step-by-step guide

In this section we give instructions detailed enough to allow a user with only a basic knowledge of
a Unix-type system to build gretl. These steps were tested on a fresh installation of Debian Etch.
For other Linux distributions (especially Debian-based ones, like Ubuntu and its derivatives) little
should change. Other Unix-like operating systems such as MacOSX and BSD would probably require
more substantial adjustments.
In this guided example, we will build gretl complete with documentation. This introduces a few
1 Up till version 1.5.1, gretl could also be built using GTK 1.2. Support for this was dropped at version 1.6.0 of gretl.

314
Appendix C. Building gretl 315

more requirements, but gives you the ability to modify the documentation files as well, like the
help files or the manuals.

Installing the prerequisites

We assume that the basic GNU utilities are already installed on the system, together with these
other programs:

• some TEX/LATEXsystem (texlive will do beautifully)

• Gnuplot
• ImageMagick

We also assume that the user has administrative privileges and knows how to install packages. The
examples below are carried out using the apt-get shell command, but they can be performed with
menu-based utilities like aptitude, dselect or the GUI-based program synaptic. Users of Linux
distributions which employ rpm packages (e.g. Red Hat/Fedora, Mandriva, SuSE) may want to refer
to the dependencies page on the gretl website.
The first step is installing the C compiler and related basic utilities, if these are not already in
place. On a Debian system, these are contained in a bunch of packages that can be installed via the
command

apt-get install gcc autoconf automake1.9 libtool flex bison gcc-doc \

libc6-dev libc-dev gfortran gettext pkgconfig

Then it is necessary to install the “development” (dev) packages for the libraries that gretl uses:

Library command
GLIB apt-get install libglib2.0-dev
GTK 2.0 apt-get install libgtk2.0-dev
PNG apt-get install libpng12-dev
XSLT apt-get install libxslt1-dev
LAPACK apt-get install liblapack-dev
FFTW apt-get install libfftw3-dev
READLINE apt-get install libreadline-dev
ZLIB apt-get install zlib1g-dev
XML apt-get install libxml2-dev
GMP apt-get install libgmp3-dev
MPFR apt-get install libmpfr-dev

(MPFR is optional, but recommended.) The dev packages for these libraries are necessary to compile
gretl — you’ll also need the plain, non-dev library packages to run gretl, but most of these should
already be part of a standard installation. In order to enable other optional features, like audio
support, you may need to install more libraries.

+ The above steps can be much simplified on Linux systems that provide deb-based package managers,
such as Debian and its derivatives (Ubuntu, Knoppix and other distributions). The command
apt-get build-dep gretl
will download and install all the necessary packages for building the version of gretl that is currently present
in your APT sources. Techincally, this does not guarantee that all the software necessary to build the CVS
version is included, because the version of gretl on your repository may be quite old and build requirements
may have changed in the meantime. However, the chances of a mismatch are rather remote for a reasonably
up-to-date system, so in most cases the above command should take care of everything correctly.
Appendix C. Building gretl 316

Getting the source: release or CVS

At this point, it is possible to build from the source. You have two options here: obtain the latest
released source package, or retrieve the current CVS version of gretl (CVS = Concurrent Versions
System). The usual caveat applies to the CVS version, namely, that it may not build correctly and
may contain “experimental” code; on the other hand, CVS often contains bug-fixes relative to the
released version. If you want to help with testing and to contribute bug reports, we recommend
using CVS gretl.
To work with the released source:

1. Download the gretl source package from gretl.sourceforge.net.

2. Unzip and untar the package. On a system with the GNU utilities available, the command
would be tar xvfz gretl-N.tar.gz (replace N with the specific version number of the file
you downloaded at step 1).

3. Change directory to the gretl source directory created at step 2 (e.g. gretl-1.6.6).

4. Proceed to the next section, “Configure and make”.

To work with CVS you’ll first need to install the cvs client program if it’s not already on your sys-
tem. Relevant resources you may wish to consult include the CVS website at www.nongnu.org/cvs,
general information on sourceforge CVS on the SourceForge CVS page, and instructions specific to
gretl at the SF gretl CVS page.
When grabbing the CVS sources for the first time, you should first decide where you want to store
the code. For example, you might create a directory called cvs under your home directory. Open a
terminal window, cd into this directory, and type the following commands:

cvs -d:pserver:[email protected]:/cvsroot/gretl login

cvs -z3 -d:pserver:[email protected]:/cvsroot/gretl co -P gretl

After the first command you will be prompted for a password: just hit the Enter key. After the
second command, cvs should create a subdirectory named gretl and fill it with the current sources.
When you want to update the source, this is very simple: just move into the gretl directory and
type

cvs update -d -P

Assuming you’re now in the CVS gretl directory, you can proceed in the same manner as with the
released source package.

Configure the source

The next command you need is ./configure; this is a complex script that detects which tools you
have on your system and sets things up. The configure command accepts many options; you may
want to run

./configure --help

first to see what options are available. One option you way wish to tweak is --prefix. By default
the installation goes under /usr/local but you can change this. For example

./configure --prefix=/usr
Appendix C. Building gretl 317

will put everything under the /usr tree. Another useful option refers to the fact that, by default,
gretl offers support for the gnome desktop. If you want to suppress the gnome-specific features
you can pass the option --without-gnome to configure.
In order to have the documentation built, we need to pass the relevant option to configure, as in

./configure --enable-build-doc

But please note that this option will work only if you are using the CVS source.
You will see a number of checks being run, and if everything goes according to plan, you should
see a summary similar to that displayed in Example C.1.

Example C.1: Output from ./configure --enable-build-doc

Configuration:

Installation path: /usr/local

Use readline library: yes
Use gnuplot for graphs: yes
Use PNG for gnuplot graphs: yes
Use LaTeX for typesetting output: yes
Gnu Multiple Precision support: yes
MPFR support: no
LAPACK support: yes
FFTW3 support: yes
Build with GTK version: 2.0
Script syntax highlighting: yes
Use installed gtksourceview: yes
Build with gnome support: no
Build gretl documentation: yes
Build message catalogs: yes
Gnome installation prefix: NA
X-12-ARIMA support: yes
TRAMO/SEATS support: yes
Experimental audio support: no

Now type ’make’ to build gretl.

+ If you’re using CVS, it’s a good idea to re-run the configure script after doing an update. This is not
always necessary, but sometimes it is, and it never does any harm. For this purpose, you may want to write
a little shell script that calls configure with any options you want to use.

Build and install

We are now ready to undertake the compilation proper: this is done by running the make command,
which takes care of compiling all the necessary source files in the correct order. All you need to do
is type

make

This step will likely take several minutes to complete; a lot of output will be produced on screen.
Once this is done, you can install your freshly baked copy of gretl on your system via

make install
Appendix C. Building gretl 318

On most systems, the make install command requires you to have administrative privileges.
Hence, either you log in as root before launching make install or you may want to use the sudo
utility:

sudo make install

 Appendix D

Numerical accuracy

Gretl uses double-precision arithmetic throughout — except for the multiple-precision plugin in-
voked by the menu item “Model, Other linear models, High precision OLS” which represents floating-
point values using a number of bits given by the environment variable GRETL_MP_BITS (default
value 256).
The normal equations of Least Squares are by default solved via Cholesky decomposition, which
is highly accurate provided the matrix of cross-products of the regressors, X 0 X, is not very ill
conditioned. If this problem is detected, gretl automatically switches to use QR decomposition.
The program has been tested rather thoroughly on the statistical reference datasets provided by
NIST (the U.S. National Institute of Standards and Technology) and a full account of the results may
be found on the gretl website (follow the link “Numerical accuracy”).
To date, two published reviews have discussed gretl’s accuracy: Giovanni Baiocchi and Walter Dis-
taso (2003), and Talha Yalta and Yasemin Yalta (2007). We are grateful to these authors for their
careful examination of the program. Their comments have prompted several modifications includ-
ing the use of Stephen Moshier’s cephes code for computing p-values and other quantities relating
to probability distributions (see netlib.org), changes to the formatting of regression output to en-
sure that the program displays a consistent number of significant digits, and attention to compiler
issues in producing the MS Windows version of gretl (which at one time was slighly less accurate
than the Linux version).
Gretl now includes a “plugin” that runs the NIST linear regression test suite. You can find this under
the “Tools” menu in the main window. When you run this test, the introductory text explains the
expected result. If you run this test and see anything other than the expected result, please send a
bug report to [email protected].
All regression statistics are printed to 6 significant figures in the current version of gretl (except
when the multiple-precision plugin is used, in which case results are given to 12 figures). If you
want to examine a particular value more closely, first save it (for example, using the genr command)
then print it using printf, to as many digits as you like (see the Gretl Command Reference).

319
 Appendix E

Related free software

Gretl’s capabilities are substantial, and are expanding. Nonetheless you may find there are some
things you can’t do in gretl, or you may wish to compare results with other programs. If you are
looking for complementary functionality in the realm of free, open-source software we recommend
the following programs. The self-description of each program is taken from its website.

• GNU R r-project.org: “R is a system for statistical computation and graphics. It consists of

a language plus a run-time environment with graphics, a debugger, access to certain system
functions, and the ability to run programs stored in script files. . . It compiles and runs on a
wide variety of UNIX platforms, Windows and MacOS.” Comment: There are numerous add-on
packages for R covering most areas of statistical work.

• GNU Octave www.octave.org: “GNU Octave is a high-level language, primarily intended for
numerical computations. It provides a convenient command line interface for solving linear
and nonlinear problems numerically, and for performing other numerical experiments using
a language that is mostly compatible with Matlab. It may also be used as a batch-oriented
language.”

• JMulTi www.jmulti.de: “JMulTi was originally designed as a tool for certain econometric pro-
cedures in time series analysis that are especially difficult to use and that are not available
in other packages, like Impulse Response Analysis with bootstrapped confidence intervals for
VAR/VEC modelling. Now many other features have been integrated as well to make it possi-
ble to convey a comprehensive analysis.” Comment: JMulTi is a java GUI program: you need
a java run-time environment to make use of it.

As mentioned above, gretl offers the facility of exporting data in the formats of both Octave and
R. In the case of Octave, the gretl data set is saved as a single matrix, X. You can pull the X matrix
apart if you wish, once the data are loaded in Octave; see the Octave manual for details. As for R,
the exported data file preserves any time series structure that is apparent to gretl. The series are
saved as individual structures. The data should be brought into R using the source() command.
In addition, gretl has a convenience function for moving data quickly into R. Under gretl’s “Tools”
menu, you will find the entry “Start GNU R”. This writes out an R version of the current gretl
data set (in the user’s gretl directory), and sources it into a new R session. The particular way
R is invoked depends on the internal gretl variable Rcommand, whose value may be set under the
“Tools, Preferences” menu. The default command is RGui.exe under MS Windows. Under X it is
xterm -e R. Please note that at most three space-separated elements in this command string will
be processed; any extra elements are ignored.

320
 Appendix F

Listing of URLs

Below is a listing of the full URLs of websites mentioned in the text.

Estima (RATS) http://www.estima.com/

FFTW3 http://www.fftw.org/

Gnome desktop homepage http://www.gnome.org/

GNU Multiple Precision (GMP) library http://gmplib.org/

GNU Octave homepage http://www.octave.org/

GNU R homepage http://www.r-project.org/

GNU R manual http://cran.r-project.org/doc/manuals/R-intro.pdf

Gnuplot homepage http://www.gnuplot.info/

Gnuplot manual http://ricardo.ecn.wfu.edu/gnuplot.html

Gretl data page http://gretl.sourceforge.net/gretl_data.html

Gretl homepage http://gretl.sourceforge.net/

GTK+ homepage http://www.gtk.org/

GTK+ port for win32 http://www.gimp.org/~tml/gimp/win32/

Gtkextra homepage http://gtkextra.sourceforge.net/

InfoZip homepage http://www.info-zip.org/pub/infozip/zlib/

JMulTi homepage http://www.jmulti.de/

JRSoftware http://www.jrsoftware.org/

Mingw (gcc for win32) homepage http://www.mingw.org/

Minpack http://www.netlib.org/minpack/

Penn World Table http://pwt.econ.upenn.edu/

Readline homepage http://cnswww.cns.cwru.edu/~chet/readline/rltop.html

Readline manual http://cnswww.cns.cwru.edu/~chet/readline/readline.html

Xmlsoft homepage http://xmlsoft.org/

321
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