Forecasting Gross Domestic Product of the Philippines using Vector Error Correction Models

Abstract

This study uses a Vector Error Correction Model as a tool for research to analyze and determine the characteristics of Gross Domestic Product (GDP) of the Philippines. Import of goods and services (import) and export of goods and services (export) are considered as influencing variables for the Gross Domestic Product of the Philippines. Quarterly data of GDP, import and exports from 1998 to 2016 were used in the study. All calculations were done using the free software JMulti. The three variables are found to be cointegrated with at most 1 rank. and the optimal number of lags is found to be 5. Furthermore, it was found out that both in the long run and short run, import has a positive impact on GDP while export has a negative impact on GDP. Based on the results of the diagnostic checks, the formulated vector error correction (VEC) model is an appropriate model for the data. Also, the generated forecasts using the VEC model are close to the actual values of the GDP. Thus, the formulated VEC model can be used for forecasting the GDP of the Philippines.