Account Cross-sectional Dependence Research Articles

The dynamics of non-intervention: applying the dynamic common correlated effects estimator to state-level economic freedom

ABSTRACT The relationship between economic freedom and economic performance is well-studied. We contribute to a dimension of the literature concerned with subnational economic freedom and subnational economic performance through the application of the Dynamic Common Correlated Effects estimator, which allows estimation for the first time to take into account cross-sectional dependence and heterogeneous slopes among US states. We find a positive relationship between economic freedom and economic growth, though when applying a battery of control variables, some specifications lose statistical significance.

Achieving sustainable development in ECOWAS countries: the impact of trade openness, poverty and human capital

This study investigates the relationship among trade openness, poverty, and human capital development in the pursuit of sustainable development across a panel of ten ECOWAS economies over a 34-year period (1987–2020). Specifically, it examines the roles of trade openness, poverty, and human capital development in sustainable development, while also exploring the moderating role of trade openness on the poverty-sustainable development relationship within the ECOWAS region. To conduct this analysis, the study employs panel autoregressive distributed lag (ARDL) using both the Pool Mean Group (PMG) estimator and Cross-Sectional Autoregressive Distributed Lag (CS-ARDL) techniques, taking into account cross-sectional dependence, cointegration, and other relevant diagnostic tests. The findings indicate that poverty has a consistent negative long-run impact on sustainable development, while human capital is positively associated with sustainability over the long term. Trade openness lacks a significant relationship with sustainability in both the short and long run. Inflation is insignificantly related to sustainability. Exchange rates demonstrate mixed effects. In terms of moderation, trade openness positively and significantly moderates the poverty-sustainability relationship in the long run but not the short run. Robustness testing using the AMG and P-OLS models further validates the significant positive impact of human capital and the insignificant effect of trade openness on sustainable development. Given poverty’s significant negative association and human capital’s positive link with sustainable development, the findings suggest the need for integrated policy mixes prioritizing multidimensional poverty reduction and human capability enhancement to promote sustainability objectives across both short- and long-term horizons in ECOWAS countries. Furthermore, prudent management of exchange rates and well-designed trade policies should complement these efforts to mitigate potential risks and harness any benefits for sustainability.

Renewable Energy and Economic Growth: Evidence from India

This article examines the nexus between economic growth and two renewable energy sources, namely wind and solar, to separate out the contrast between these two sources, for India deploying system generalised method of moments and vector error correction method suitable to capture the dynamic nature of panel data. Unlike most of the earlier studies, it takes into account cross-sectional dependence and addresses the issue of endogeneity. India has been chosen because despite India being one of the largest producers of renewable energy globally; the nexus is under-studied. This article finds the installation of solar energy capacity positively influences the Gross State Domestic Product (GSDP) growth. Moreover, there is a bi-directional positive relation between the installation of wind energy capacity and GSDP growth. Hence the adoption of renewable energy is helping the states to grow faster. However, the study found not much difference in the nature of the nexus between solar energy growth and wind energy growth for India. JEL Codes: O13, P28, P44, Q56

The relationship between carbon intensity of loans and renewable energy production: A cross-country analysis of developmental stage and financial system maturity effects

This study explores the influence of carbon intensity of loans issued by financial institutions (CIL) on facilitating energy transition. By analyzing cross-country panel data from 2005 to 2018, we unveil a notable influence of CIL on renewable energy production, taking into account cross-sectional dependence. Our regression analysis, employing panel-corrected standard errors, indicates that a 1% decrease in CIL correlates with a 0.9169% and 0.9189% rise in renewable energy production per capita and per GDP, respectively, along with a 0.1180% growth in renewable energy's share. This effect of promotion is more pronounced in nations with higher developmental levels, lower emission rates, greater banking sector reliance, and increased energy import dependency. Additionally, our study identifies a significant role played by the development of financial institutions in the reduction of CIL. Conversely, the moderating influence of R&D appears less clear. Utilizing the Panel Granger test, we establish a bidirectional causal link between CIL and renewable energy production, which sustains over the long term. Our findings offer valuable insights for policymakers and financial bodies aiming to meet climate objectives.

The relationship between economic globalization and ecological footprint: empirical evidence for developed and developing countries

Purpose. The aim of this study is to examine the relationship between economic globalization and the ecological footprint in countries with different levels of development using a Feasible Generalized Least Squares (FGLS) analysis.
 Methodology / approach. The study covers the years 1970 to 2017 for 65 developed and developing countries. The ecological footprint is the dependent variable in the study’s model, and the GDP and KOF Globalization Index (KOF) index are the independent variables. The CADF panel unit root test, which takes into account cross-sectional dependence, was used to choose the appropriate test method for the analysis. Feasible Generalised Least Square and Westerlund ECM panel cointegration analyses were performed for model estimation.
 Results. Economic globalization and ecological footprint have a considerable relationship, according to the results of FGLS and Westerlund cointegration analysis. Economic globalization has a long-run negative impact on the ecological footprint. Environmental problems are being addressed as a result of more economic globalization, faster technology development, and consequently decreased usage of natural resources. Furthermore, as globalization and communication technologies develop, societies will have more information on the importance of the environment. As a result, they can show more eco-friendly behavior.
 Originality / scientific novelty. Several studies in the literature include the cointegration relationship between economic globalization and ecological footprint. Although there are few studies on this topic in the literature, one aspect that distinguishes this study is the use of an estimation method that takes into account the cross-sectional dependent, second-generation unit root tests, FGLS cointegration analysis, and Westerlund ECM analysis.
 Practical value / implications. The importance of the findings is that increased economic globalization has a negative effect on the ecological footprint. As economic globalization increases, so does communication technology, as well as international trade. Individuals become more environmentally conscious as a result of communication, which generally reduces ecological footprint.

The Dynamic Links between Renewable Energy and Environmental Quality in an Insecure Situation

Abstract The world faces two main problems: environmental degradation and the growing number of terrorist attacks. This study provides new perspectives by evaluating the links between environment quality, renewable energy consumption, terrorist attacks and the rents of natural resources for forty-six African countries over the period 1991–2017. We applied a heterogeneous panel data approach and second-generation econometric techniques, which took into account cross-sectional dependence and heterogeneity. The long-term effects were obtained by AMG and CCMG estimators. The results confirmed the existence of a cross-sectional dependence between the individuals in the panel. In addition, the long-term relationship confirms the existence of an inverted U-shaped curve between CO2 emissions and the level of GDP. Renewable energies stimulate the improvement of environmental quality in the long term whereas terrorist attacks contribute to environmental degradation. Thus, policymakers are called upon to promote renewable energies and to implement good governance of rents.

The effects of military expenditures on labor productivity, innovation and economic growth for the most militarized countries: panel data analysis

PurposeThere is extensive literature on the effect of military expenditure on economic growth. However, there is also a wide gap in the literature on the relationship between productivity and innovation, which is considered the driving force of economic growth and military expenditures. To this end, this study examines the effect of military expenditures on economic growth, innovation and labor productivity for the period 1995–2019 in most militarized countries.Design/methodology/approachThe tests used in the study's empirical analysis are techniques that take into account cross-sectional dependence and heterogeneity. The stationarity of the variables was tested with the Pesaran’s (2007) unit root test. Then, empirical findings were revealed based on the analysis through Westerlund’s (2008) cointegration test and Emirmahmutoglu and Kose’s (2011) panel causality test.FindingsAccording to the empirical results, there is a long-run relationship, in other words, a cointegration between military expenditures and productivity, innovation and economic growth. Additionally, there are causality relationships between military expenditures and productivity, innovation and economic growth.Practical implicationsThese results support the arguments of military Keynesianism and the Benoit hypothesis.Originality/valueDespite the widespread theoretical debate, no empirical study tests the effect of military expenditure on productivity and innovation to the author's best knowledge. Hence, this study aims to fill this gap in the literature. Moreover, the fact that the econometric method used is based on second generation tests and the timeliness of the period range makes the study's findings more significant.

Causal Nexus Between Ownership Structure, Dividend Policy and Financial Performance: A Bootstrap Panel Granger non-causality Analysis

ABSTRACT Regarding the causality nexus between the various dimensions of corporate governance (ownership structure, dividend policy) and financial performance (return on equity, return on assets, Tobin’s Q), the empirical results are mixed. Therefore, this study tries to examine the existence and the direction of causal relationship between these major indicators in an emerging economy, namely Tunisia for a sample of 375 firm-years observations during the period 1996–2020. This study applies a bootstrap panel Granger non-causality test which takes into account cross-sectional dependence and slope heterogeneity issues. Results show the existence of both unidirectional and bidirectional significant causal link between the pair of used variables. Overall, when comparing between Kónya and Dumitrescu and Hurlin approaches, the findings highlight and confirm the convergence of the direction of causality between all variables used in this study.

Illicit financial outflows, informal sector size and domestic resource mobilization in selected African countries

PurposeThe growth of both the informal sector and illicit financial outflows necessitated this study, in order to investigate how countries in Africa respond to these realities in terms of mobilization of domestic resources. These are the main motivation for the current study to the extant literature in conjunction with the adoption of employing second-generation econometric techniques which take into account cross-sectional dependence and country-specific heterogeneity.Design/methodology/approachThis study therefore examined the capacity of Africa to mobilize domestic resources amidst rising illicit financial outflows and informal sector size in selected African countries between 2000 and 2018. Second-generation econometric techniques such as cross-sectional dependence tests, slope homogeneity tests, Westerlund (2007) long-run co-integration tests, Eberhardt and Teal (2010) augmented mean group estimations and Kónya (2006) panel causality testing were employed.FindingsFindings revealed the existence of cross-sectional dependence and slope homogeneity in the data series. Findings also supported the existence of depressing long-run impacts of IFOs and ISS on domestic savings. Causality test results were not uniform across variables among countries. Policy recommendations favour formalizing the largely informal African economies through budgetary policy adjustments and commitment to building stronger institutions.Practical implicationsThe fragility of the African countries economy and its macroeconomic indicators is suggestive for more policy construction.Originality/valueThis economic reality about the nature of the informal sector is one that has negated the traditional view which holds that economic reforms would make the informal sector shrink as it transits to formal sector. Experiences from Latin America and Africa in fact indicate that the informal sector is actually on an expansionary path in the wake of adjustment and policy reforms. It is often called the unobserved, unorganized or unprotected economy. With this sector growing in size, the possibility of a reverse may not be in sight, owing to the increasing poverty levels and unemployment prevalent in most African countries. Uncertain foreign investment and aid inflows coupled with lower export revenues and high levels of indebtedness have created new impetus to examine the capacity of Africa's fiscal policy regime to mobilise domestic resources for the development of the region. Surprisingly, the last decade witnessed continued rise in Africa's illicit financial outflows amidst large informal sector size (ISS).

Relationship between economic freedom and inclusive growth: a dynamic panel analysis for sub-Saharan African countries

Recent debates in economic development emphasize the importance of economic freedom and inclusive growth, particularly in developing countries. The aim of this study is to analyze the relationship between economic freedom and inclusive growth in thirty sub-Saharan African countries during the period 1996–2016. We use, for that purpose, the system GMM estimation and a panel causality test in a dynamic framework. Inclusive growth is measured by the GDP per person employed in Purchasing Power Parity, and the Heritage Foundation Economic Freedom Index is used to measure economic freedom. After taking into account cross-sectional dependence, the results suggest a positive and significant effect of the level of economic freedom and of the changes in the level of economic freedom on inclusive growth. Evidence is provided for a causal relationship from economic freedom to inclusive growth but not the other way.

Banking sector development and economic growth in developing countries: a bootstrap panel Granger causality analysis

The purpose of this paper is to revisit the Granger causal relationship between banking sector development and economic growth for forty developing countries in the period 1970–2012. In order to capture the different aspects of banking sector development, we use two banking sector development indices and apply a panel bootstrap approach to Granger causality testing which takes into account cross-sectional dependence and heterogeneity issues. The empirical results show limited support for the supply-leading, demand-following and complementarity hypotheses, but provide evidence for a causal relationship between banking sector development and economic growth in twenty-five countries.

Volatility Spillovers with Spatial Effects on the Oil and Gas Market

The article is devoted to the estimation of volatility spillovers occurred on the oil and gas market taking into account cross-sectional dependence. The latter is implemented via spatial specifications of the BEKK multivariate volatility model. We also use DCC, GO-GARCH and ADCC models as a benchmark.

IMPACT OF CAPITAL INTENSITY AND R&D SPENDING ON MANUFACTURING INDUSTRY VALUE ADDED IN INDUSTRY 4.0 PROCESS: PANEL DATA ANALYSIS

Industry 4.0 or 4th Industrial Revolution is a phenomenon, which is being discussed more day by day all around the world, and it is undoubtedly a fact to be taken into consideration with all aspects of the situation because it is the latest generation of the revolutions. From this perspective, in this paper, the relationship between drivers of production of industry 4.0 and manufacturing value added that is the core of economic development/growth is determined using panel data covering the nine leading countries in the industry 4.0 process over the period 1996-2015. Empirical results of this study was applied by the Dumitrescu-Hurlin (2012) panel Granger causality test, which takes into account cross-sectional dependence indicate one-way causality from capital intensity to manufacturing value added, two-way causality between R&D expenditures as a share of GDP and manufacturing value added in the selected country group. In addition, empirical findings showed that greater capital intensity and R&D expenditures of GDP, which are the input variables of industry 4.0 process significantly increase manufacturing value added, which is the one of the output variables of the process.

Volatility Spillovers with Spatial Effects on the Oil and Gas Market

The article is devoted to the estimation of volatility spillovers occurred on the oil and gas market taking into account cross-sectional dependence. The latter is implemented via spatial specifications of the BEKK multivariate volatility model. We also use DCC, GO-GARCH and ADCC models as a benchmark.

Financial crisis and saving–investment dynamics in the presence of cross-sectional dependence: The case of East Asia

Using the common correlated effects mean group (CCEMG) technique to a set of balanced panel error correction model, we examine the effects of the Asian financial crisis of 1997, and the global financial crisis of 2008 on the behavior of saving and investment in East Asian countries. Our results show that saving and investment rates are highly dependent across countries of East Asia. This finding underlines the importance of taking into account cross-sectional dependence when analyzing saving–investment relationship. The results also indicate that the adverse financial shock of 1997 has negatively affected the short run correlation between saving and investment, but has not influenced their long run relationship. Our finding, hence, verifies the prediction of new open economy macroeconomic theories regarding the divergence of short run saving–investment from its long run trend for East Asia. Moreover, we find that the global financial crisis of 2008 has not affected the saving–investment dynamics in this region. It means that the consequences of the Asian and global financial crises for saving–investment dynamics are not the same in East Asia. One might attribute these differences to the origins of these two shocks, i.e., internal versus external to the region. These findings may have some policy implications for those countries that rely heavily on foreign investment and are subject to various internal and external financial shocks.

ENERGY CONSUMPTION AND GDP IN ASEAN COUNTRIES: BOOTSTRAP-CORRECTED PANEL AND TIME SERIES CAUSALITY TESTS

This study reexamines the relationship between energy consumption per capita and real GDP per capita for Indonesia, Malaysia, the Philippines, Singapore and Thailand using both panel data causality which is taking into account cross-sectional dependence and heterogeneity among the countries and time series causality tests for the period 1971–2009. The findings indicate that taking into account cross-sectional dependence has a substantial effect on the achieved results. The conservation hypothesis is supported for Indonesia, Malaysia and the Philippines. Although a bidirectional relation is found in the case of Thailand, since there is no positive effect of energy consumption on GDP, the conservation hypothesis is supported. In the pattern of Singapore, the neutrality hypothesis is supported. In addition, the increase in investment and labor force lead to more energy consumption in Indonesia, Malaysia and Thailand.

On the stationarity of per capita carbon dioxide emissions over a century

This paper examines the stationarity of carbon dioxide (CO2) emissions per capita for a set of 36 countries covering the period 1870–2006. We employ recently developed unit root and stationarity tests that allow for the mean reverting process to be nonlinear and take into account cross sectional dependence. By grouping countries according to their geographical proximity, the importance of cross sectional dependence in panel unit root and stationarity tests is revealed. Using a recently developed nonlinear panel unit root test, we find strong evidence that the per capita carbon dioxide emissions over the last one hundred and fifty years are stationary. Our nonlinear specification captures the dynamics of the emissions time series data more effectively and we obtain evidence supporting stationarity for all country groups under study.

Development aid, Openness to Trade and Economic Growth in Least Developed Countries: Bootstrap Panel Granger Causality Analysis

This study examines causal relations among development aid, openness to trade and economic growth in the Least Developed Countries (LDC), for the period between 1970 and 2010. The variables under scrutiny are real per capita GDP, openness to trad e ratio and total net Official Development Assistance as share of national income. By making use of a new Granger causality testing approach properly taking into account cross-sectional dependence and heterogeneity issues, this paper finds no significant causality relation among foreign aid, openness to trade, and economic growth in a panel of African LDCs.

Purchasing Power Parity and the European single currency: Some new evidence

The effect of the single currency on the Purchasing Power Parity (PPP) hypothesis is examined in this study for the 15 EU countries, vis a vis the US dollar, before and after the advent of the euro. Standard as well as nonlinear unit root tests are employed on the time series dimension. Unit root tests reject PPP and the highest half-lives are observed after the introduction of the single currency. Panel unit root (Pesaran, 2007) and stationarity tests (Hadri and Kurozumi, 2008) that take into account cross-sectional dependence are also estimated. The results remain inconclusive as panel stationarity tests fail to support PPP whereas panel unit root tests fail to reject PPP for the whole sample and for the period before the introduction of the single currency.

The hypothesis of a unit root in OECD inflation revisited

This paper investigates the hypothesis of a unit root in inflation for 13 OECD countries over the period 1957–2005, taking into account cross-sectional dependence and multiple mean shifts. We conduct unit root testing with the more powerful unit root tests with cross-dependence proposed by Smith et al. [Smith, L. V., Leybourne, S., Kim, T., & Newbold, P. (2004). More powerful panel data unit root tests with an application to the mean reversion in real exchange rates. Journal of Applied Econometrics, 19(2), 147–170] and a bootstrap version of the panel stationarity test of Hadri [Hadri, K. (2000). Testing for stationarity in heterogeneous panel data. The Econometrics Journal, 3(2), 148–161.], which provide inconclusive evidence on the time series properties of OECD inflation rates. To shed some light on this issue, we employ the recently developed panel stationarity test of Carrión-i-Silvestre et al. [Carrión-i-Silvestre, J. L., Del Barrio, T., & López-Bazo, E. (2005). Breaking the panels: An application to the GDP per capita. The Econometrics Journal, 8(2), 159–175] that assumes a highly flexible trend function by incorporating an unknown number of breaks in level. Overall, our confirmatory analysis renders clear-cut evidence in favor of regime-wise stationarity. Furthermore, the breaks in inflation detected are closely associated with macroeconomic shocks and changes in monetary policy.