Abstract
PurposeThe purpose of the paper is to test and analyze the equilibrium economic relationships of the East Africa Community (EAC).Design/methodology/approachTo attain the study's purpose the authors applied the Johansen cointegration test, including long-run structural modeling (LRSM), vector-error-correlation-model (VECM) and variance-decomposition (VDC).FindingsAt I(1), both Philips‐Peron (PP) and Kwiatkowski–Phillips–Schmidt–Shin (KPSS) tests show that the East Africa member states' economies are cointegrated. The result was further substantiated by the tests based on Johansen cointegration and VECM procedures, showing significant long-run and short-run economic relations. The result further reveals that despite some uncommon issues among member states such as Tanzania and Kenya, however, their economic relationships remain significant though it is negative. Moreover, the finding revealed positive and significant short-run economic relationships between Kenya, Burundi and Rwanda.Originality/valueThe paper applies the cointegration techniques in the context of EAC. The result is likely to be adding value to the policymaker and also to the existing literature on the subject. This may trigger policy implications and open new research direction within the region and out.
Highlights
The cointegration technique has been developed recently over the past years; its rapid progress to a great extent is due to its usefulness in modeling the long-run relations of economic variables from time-series data (Lu€tkepohl, 2004)
The present paper applies the concept Johansen cointegration test in the context of the East Africa Community (EAC) to analyze empirically the theoretical economic relationships through the application of various econometric tools including the long-run structural modeling (LRSM) developed by Garratt et al (2006). This is so because, to the best of our knowledge, we did not find recent studies related to the cointegration test of regional economic integration using the same methodology most of the available studies in EAC are related to; for instance, Babu et al (2014) investigated the impact of external debt on EAC economic growth using a panel-data approach with the Hausman test; the findings reveal a negative growth effect for external debt on Gross Domestic Product (GDP)
Please note here that the application of the intra-trade data was undertaken just to validate how the findings of the study can be related to some economic variables such as trade; the reason behind choosing the intra-trade data is because the previous study by Goto (2012) reveals a stronger trade interdependency in the East Africa region
Summary
The cointegration technique has been developed recently over the past years; its rapid progress to a great extent is due to its usefulness in modeling the long-run relations of economic variables (economic equilibrium) from time-series data (Lu€tkepohl, 2004). The concept was initially developed by Granger (1981), and Engle and Granger (1987) has become a standard tool in econometrics over the last four decades. The development of the concept was influenced by the fact that non-stationarity in time-series data, either stochastic or deterministic, can bring a major problem for econometric analysis as they produce a spurious regression. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode
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