An Empirical Analysis of the Supply Response of Coconut by Vector Error Correction Approach: Cross Country Comparison

Abstract

This study estimates the output supply response of coconut in major producing countries using the cointegration approach. Regional variations in the domestic coconut production in Sri Lanka, India (represented by the state of Kerala), and the Philippines were captured by applying a Vector Error Correction Model (VECM). National aggregate time series data for the period 1970-2019 were used in the analysis. The empirical results show that unique long-run equilibrium relationships exist among coconut production, the coconut price, and the climate variable in three individual markets and the panel estimation. The regional disparities are revealed by the short-run dynamics throughout the analysis. Altogether, the econometric estimates provide strong evidence that the coconut producers respond rationally to the changes in own price and other supply determinants. However, both short and long-run price elasticities of the coconut supply response are rather low amidst its significance, suggesting that any pricing policy requires a comparatively long lead time for it to become effective in accelerating production. Furthermore, the estimated panel VECM can be further developed and validated to be used as a tool to analyze the regional deviances for assisting the policymakers in making comprehensive strategies to ensure the industry’s long-term sustainability.