Autoregressive Distributed Lag Error Correction Research Articles

Comparative Analysis of the Portfolio-balance Models of Exchange Rate Determination

The current study conducts a comparative analysis of Portfolio-Balance Models (PBM) developed by Branson, Kouri and Dornbusch to assess the role of expectations and time horizons in determining and forecasting the India–US exchange rate over the period 1996:Q2–2019:Q3. Notably, it improves the original models by integrating microstructure theory into their framework. The Autoregressive Distributed Lag Error-Correction Model (ARDL-ECM) is used to investigate both short run and long run behaviour of the models. Additionally, the study assesses out-of-sample forecasting accuracy of the modified models against the Random Walk Model (RWM) using the root mean square error metric. The estimation results reveal that models based on rational expectations are better than the static expectations model. Notably, the microeconomic determinant is counterintuitively significant only in the long run across all models. Furthermore, these modified models demonstrate superior out-of-sample forecasting abilities compared to RWM for alternative forecasting horizons. However, forecasting results over a 6-month period is better with short run models. Over 1-year and 2-year horizons, rational expectations models outperform the static expectations model. This study challenges the Meese–Rogoff puzzle, ensuring that PBM, when modified to incorporate microstructure theory, is valid and yields superior forecasting results compared to RWM. JEL Codes: F31, F32, C22

The macroeconomic overview of the alcohol industry: a perspective from the emerging market of Asia

Purpose This study aims to analyze the relationship between the alcohol brewing industry and the macroeconomic variables of the emerging market of Asia. Design/methodology/approach The study uses secondary data for the period of 32 years and applies the autoregressive distributed lag-error correction method (ARDL-ECM) approach to understand short- and long-run dynamics in the alcohol industry by considering macroeconomic variables. Findings The findings of the study confirm the existence of a long-run relationship between the alcohol brewing industry and the macroeconomic variables considered for this study. Research limitations/implications The authors present a few limitations of this study. First, this study uses secondary data originating from one of the emerging markets of Asia. Second, the study is solely conducted from an economic perspective rather than from a social or health perspective. Finally, the study considers the data originating from the organized sector of the alcohol industry of India. Practical implications The study will be helpful to the researchers in guiding the future course of research in the area of the alcohol industry. This study can be helpful to the policymakers in framing the National Alcohol and taxation Policy. This study also helps both the producers and exporters to strategize sustainable production and trade of alcoholic beverages. Originality/value To the best of the authors’ knowledge, this study is the first of its kind to analyze the alcohol industry from the macroeconomic perspective through the ARDL-ECM approach.

The role of human capital development in urbanization-economic growth nexus: A new insight on Nigeria

Given the inevitable rise in global urban size, it has become pertinent to prioritize sustainable urban development which supports economic growth. Hence, the surge in sustainable urban-economic growth literature. Moreover, there is a growing argument that the growth effect of urbanization is contingent on the mediating roles of certain macroeconomic factors. However, despite being one of the fastest urbanizing countries in the world, extant studies on urbanization-economic growth nexus in Nigeria are few and the possible modulating roles of macroeconomic factors in the nexus has not been studied. Therefore, using annual data spanning between 1991 and 2022, this study examines the modulating effect of human capital development (HCD) in the relationship between urbanization and economic growth in Nigeria. For the empirical analysis, the study adopts the autoregressive distributed lag error correction model (ARDL-ECM). Robustness of the findings is tested using the dynamic ordinary least square (DOLS) estimator. The regression outcomes s show that while urbanization independently does not promote economic growth, its interaction with the measure of HCD produces a positive coefficient suggesting that HCD mitigates the adverse effect of urbanization on economic growth. Based on the findings, the study recommends that urban development policies should be compatible with achieving well-managed cities in order to harness the agglomeration economies benefits of increasing urbanization process. In addition, due to the favourable role of HCD in the urbanization-economic growth relationship, strategic plans focused on promoting human capital in the form of education and health should be focalized in urban development policies.

Analysis of Determinants: Indonesian Case

Exports directly impact national income, which will also have implications for increasing levels of productivity, innovation, and technology transfer. The urgency of exports from an open economic perspective is to increase the capacity for economic growth. Unfortunately, various factors often hinder export performance, disrupting the potential benefits. The main objective of this study is to analyze the impact of macroeconomic variables, namely the exchange rate, foreign direct investment (FDI), Gross Domestic Product (GDP) per capita, and inflation on Indonesian exports in the period 1970-2022. This research uses time series data with the Autoregressive Distributed Lag-Error Correction Model (ARDL-ECM) method. The findings of the analysis show that the exchange rate, FDI, GDP per capita, and inflation have a positive and significant effect on exports in the long term. Therefore, if the Indonesian government wants to maintain its trade balance, it is recommended to keep a floating and controlled exchange rate policy and coordinate pro-export-oriented investment policies.

The Influence of Taxation and Economic Growth on Consumers’ Burden in Malaysia

The tax reformation and economic development in Malaysia have sparked the motivation of this study to understand the influence of such reform on consumers’ burden. An investigation into these relationships is important due to the current increase on consumers burden which had become a popular issue since the introduction of GST in 2015, and the comeback of SST in 2018 to replace the GST. This study intends to provide evidence concerning Malaysian tax reform and economic growth on consumers burden by examining the influence on price level. It employs the Autoregressive Distributed Lag Error Correction Model (ARDL-ECM) estimation to analyze quarterly data for the period 1996-2020. The findings reveal that indirect taxes have negative relationship both in the short and long run while economic growth is positively related with consumers’ burden. This outcome rules out the public accusation that the tax reform would cause the price level to increase hence worsen the consumer’s burden. Nevertheless, it is the economic growth that consumers need to take advantage of as it positively influences the demand for goods and services hence increase the price. The study shed further direction for the government in formulating taxation and economic policies so as not to compromising the burden of consumers.

Time-series analysis of the health outcomes-financial development nexus: Evidence from South Africa

This study contributes to the literature by investigating the health and financial development nexus in South Africa. The ‘health is wealth’ debate was again exemplified by the outbreak of the COVID-19 pandemic, thereby raising awareness of the inescapable links between poor health and diverse threats to global socioeconomic prosperity. Thus, the influencing factors of health have continued to be studied. Accounting for structural breaks, the study estimates annual time series data sourced from the World Development Indicators within the autoregressive distributed lag error correction model (ARDL-ECM). The regression outcomes show that financial development has differential impacts on health outcomes. In particular, financial development proxied by domestic credit to the private sector has a negative effect on life expectancy at birth while reducing child mortality, thereby fostering better child health outcomes. This research engages health policy strategists on the right policy mix to achieve better health outcomes. While the financial development drive is ongoing, efforts should be intensified to improve socioeconomic determinants of health, and policy strategies aimed at solving national priority health challenges should be logically pursued.

The influence of good governance on the tourism sector: The case of South Africa

Over the last decades, the tourism sector has contributed to the national and regional economies in South Africa, while governance levels have regressed over time. The study’s objective was to investigate the impact of good governance on the success and growth of the tourism sector in South Africa, a proxy for developing countries. The hypothesis is that good and effective governance could positively impact tourism growth. A quantitative research methodology was used with econometric methods such as an Autoregressive Distributed Lag Error Correction (ARDL-ECM) process. The estimation indicated a long-run relationship between the variables. The tourism sector contributes significantly to the South African economy, and the government should note the importance of good governance, as indicated through this study, in the success and development of the sector. Given tourism's potential to achieve some of the Sustainable Development Goals and positively influence economic growth and development, relevant parties are urged to pursue good governance in the sector.

An Empirical Analysis of Selected Macroeconomic Indicators and Agricultural Value Added in Nigeria

This study seeks to establish the relationship between agriculture value added and some selected macroeconomic factors in Nigeria from 2000-2022. Augmented Dickey Fuller unit root tests, co-integration test with Auto regressive Distributed Lag Bound test, Auto regressive Distributed Lag-Error Correction Model analysis were carried out on the data for the variable. The results revealed that GDP per capita (LNGDPC) (proxy for market size) has negative affect on agriculture value added while exchange rate (LNREXR), foreign direct investment (LNFDI) (proxy for technology), and index of human capital per person (LNIHC) (proxy for labour) exhibit positive impact on agriculture value added in Nigeria in the long run. As such, Nigerian government should promote policies (security issues) that are directed at attracting more foreign direct investment inflow to the agricultural sector so as to boost technology and agriculture value added. Similarly, it is critical to invest in human capital through training and education, given that agricultural technology is rapidly evolving. Lastly, through fiscal and monetary policies management, it is also vital for Nigerian government to increase agriculture value added by controlling inflation and building a stable exchange rate that will enhance foreign exchange earnings, encourage flexibility and competitiveness of farmer.

The impact of exchange rates on stock market performance of the Emerging 7

Purpose The purpose of this research is to study the relationship between exchange rate fluctuations and stock market returns of the seven highest economic performing emerging countries (E7).Design/methodology/approach The study is conducted using the daily data for exchange rates and stock market returns in each of the E7 countries from January 1, 2019, to January 1, 2022. The study employs the ordinary least squares, autoregressive distributed lag error correction regression and generalized autoregressive conditional heteroskedasticity (GARCH (1,1)) regression models to fully investigate the impact of exchange rate on stock markets. For further investigation, the GARCH (1,1) model is run twice for each country with and without the inclusion of exchange rate to determine its effect on the volatility of stock returns.Findings The findings support the presence of cointegration relationship between the variables for all countries. The results reveal significant positive long-run relationship between exchange rates and stock market returns in all countries except for Indonesia, which evidenced a significant negative impact. The results of the GARCH (1,1) add that the inclusion of exchange rate in the model accounts for a slight change in the volatility of stock returns.Originality/value The research provides empirical evidence that appreciating currencies are perceived positively by investors leading to better performing capital markets. The outcomes of this study may assist policy makers in understanding to what degree changes in exchange rates can influence capital markets, as well as narrow the gap in literature regarding which theory is more relevant in explaining how exchange rate fluctuations impact market values.

Impact of financial development, energy consumption and urbanization on CO2 emissions from buildings using quantile ARDL model

Urbanization plays a crucial role in facilitating the integration of population growth, industrial development, economic expansion, and energy consumption. In this paper, we aim to examine the relationships between CO2 emissions and various factors including economic growth, urbanization, financial development, and energy consumption within Pakistan’s building sector. The study utilizes annual data spanning from 1990 to 2020. To analyze the cointegration relationship between these variables, we employ the quantile autoregressive distributed lag error correction model (QARDL-ECM). The findings of this research provide evidence supporting the presence of an asymmetric and nonlinear long-term relationship between the variables under investigation. Based on these results, we suggest the implementation of tariffs on nonrenewable energy sources and the formulation of policies that promote sustainable energy practices. By doing so, policymakers and architects can effectively contribute to minimising environmental damage. Overall, this study offers valuable insights that can assist policymakers and architects in making informed decisions to mitigate environmental harm while fostering sustainable development.

The effects of green finance, environmental tax and industrial ecologicalization towards carbon neutrality targets in China: evidence from autoregressive distributed lag-error correction model

The effects of green finance, environmental tax and industrial ecologicalization towards carbon neutrality targets in China: evidence from autoregressive distributed lag-error correction model

Investigating the causal impacts relationship between economic flood damage and extreme precipitation indices based on ARDL-ECM framework: A case study of Chungcheong region in South Korea

The attribution of climate change to various natural disasters, including flood events, has continued to receive a considerable attention as it impacts the socioeconomic sustainability of society. However, the existing knowledge on the influential role of extreme precipitation on flood events and subsequent economic damage is limited. Thus, this study investigates the causal relationship between flood damage cost, flooded area, and extreme precipitation indices in the Chungcheong region of South Korea using the autoregressive distributed lag-error correction model (ARDL-ECM) framework and pairwise Granger causality analysis. Four extreme precipitation indices: consecutive wet days (CWD), number of very heavy precipitation days (R30mm), maximum 1-day precipitation amount (Rx1day), and simple daily precipitation intensity (SDII) that measure precipitation frequency, intensity, and duration were selected with time series data on the flooded areas and estimated flood damage cost from 1985 to 2020. The ARDL-ECM bound test indicates an existence of a long-run relationship among all the variables. The empirical results of pairwise Granger causality analysis further reveal that flooded area, R30mm, and Rx1day have significant positive causal impacts on the flood damage cost in both short and long-runs, in the current period. This implies that any increase in any of these variables will cause an increase in the flood damage cost. Unidirectional causality exists from the flooded area, R30mm, Rx1days, and SDII to flood damage cost, and from R30mm and SDII to flooded area. These extreme precipitation variables could serve as indicators of flood events and economic flood damage. This study advances the knowledge of the causal link between extreme precipitation indices and economic damage from flood events.

Foreign direct investment and tax revenue mobilization in South Africa: an ARDL bound testing approach

ABSTRACT In addition to performing their basic fiscal functions, governments in developing economies are constantly challenged by new and re-emerging socioeconomic issues such as insecurity, hunger, natural disaster, collapsing infrastructure and disease outbreaks which have made the competition for limited resources fierce and hence the need to mobilize funds. Revenue mobilization forms a critical crux of development plans in any economy and the public finance literature is replete with an investigation of factors that motivate revenue mobilization. In spite of the documented indisputable roles of foreign direct investment (FDI) in the economic performance of developing economies and the resultant aggression in mobilizing FDI, its implications for tax revenue have not been well investigated. This study, therefore, assessed the role of FDI in mobilizing tax revenue in South Africa. Accounting for the potential structural break, the study used time series data from 1994 to 2021 within the Autoregressive Distributed Lag–Error Correction Model (ARDL-ECM). The results showed that FDI has a statistically significant negative effect on tax revenue. Following the outcomes of this study, it is recommended that in addition to sound public finance policies, the government should prioritize efficient investment policies in its FDI mobilization drive.

Aquaculture Production in the Midst of GHG Emissions in South Africa

The study ascertained the relationship between aquaculture production and greenhouse gas (GHG) emissions in South Africa. The study used the Autoregressive Distributed Lag—Error Correction Model (ARDL-VECM) with time series data between 1990 and 2020. The results showed that the mean annual aquaculture production, GHG emissions, and Gross Domestic Product (GDP) in the period were 5200 tonnes, 412 tonnes, and US$447 billion, respectively. There was a long-run relationship between GHG emissions and GDP. In the short run, GHG emissions had a positive relationship with GDP and a negative relationship with beef production. Furthermore, there was a bi-directional relationship between aquaculture production and GHG emissions. In addition, beef production and GDP had a bi-directional relationship. Beef production also had a positive relationship with aquaculture production. The study concludes that aquaculture production is affected and tends to affect GHG emissions. Aquaculture legislation should consider GHG emissions in South Africa and promote sustainable production techniques.

Analyses of Macroeconomic Drivers of Stock Market Development in Nigeria

The paper investigates the long run and short run relationship between the endogenous variable (stock market development) and exogenous variables (economic growth, banking sector development, inflation, stock market liquidity and trade openness) in Nigeria. Annual data were collected using desk survey approach. Autoregressive Distributed Lag (ARDL) test and ARDL error correction regression model was used after preliminary tests were carried out to ascertain stationarity properties. From the result of the analyses, it was discovered that gross domestic product, domestic credit to private sector and trade openness has negative impact on Nigeria stock market development in the long run, whereas inflation rate and total value of shares traded had a positive impact on the development of the Nigeria stock market in the long run. The results suggested that domestic credit to private sector, stock market liquidity, ratio of credit to private sector, total value of traded stock as well as ratio of trade openness are key drivers of stock market development in Nigeria. As part of recommendations, government should strengthen and solve the weaknesses affecting development of Nigeria’s stock market. Policy makers should pursue those policies that stimulate banking sector development so as to promote immediate development of the stock market and government should intensify efforts in stability of inflation rate so as to promote stock market development in the long- run.

Assessing the long-run and short-run effect of monetary variables on stock market in the presence of structural breaks: evidence from liberalized India

PurposeThe present study examines the long-run and short-run effects of monetary factors (money supply, interest rate, inflation and foreign currency exchange rate) on the Indian stock market.Design/methodology/approachThe study used sophisticated econometric tools to analyse monthly observations from January 1993 to December 2019.FindingsThe augmented Dickey–Fuller (ADF) test indicates that the variables involved in the present study are either I(0) or I(1). The Bai–Perron test multiple break point test identifies four breakpoint dates in the Indian stock market index series. The breakpoint dates are incorporated as different dummy variables in the autoregressive distributed lag-error correction model (ARDL-ECM) regression. The F-bounds test reveals that the variables in the study are cointegrated within the time period under consideration. This study’s findings show that the interest rate, which is a proxy for monetary policy instrument, and the foreign currency exchange rate have a negative impact on the Indian stock market. Furthermore, the authors find that structural changes significantly affect the performance of Indian stock market.Practical implicationsThe study's outcomes indicate that economic factors should be taken into account by investors and portfolio managers when formulating long-term investment strategies. The government, through the Reserve Bank of India, should exercise caution in avoiding discretionary actions that could increase interest rates since the flow of funds to the stock market will be disrupted. To reduce risk, investors should keep a close eye on how interest rates and foreign exchange rates are rising.Originality/valueThe study covers a long period of time, which the majority of previous work did not consider. Furthermore, the study uses different dummy variables in the ARDL model to represent structural breaks (as determined by the Bai–Perron multiple break point test).

Effect of Selected Macroeconomic Variables on Budget Deficit in Kenya

Macroeconomic stability has been a concern to many economies as it shows the economic health of a nation. Kenya has had unsustainable and persistent fiscal deficit which has been phenomenal in the recent past despite several economic reforms being established in an attempt to stabilizing the economy. The study was informed by the persistent increase in the budget deficit in Kenya amidst economic stagnation and macroeconomic instability. This therefore led to an attempt to establish the effect of selected macroeconomic variables on the budget deficit in Kenya. The specific objectives were to determine the effect of interest rates; exchange rate; inflation and money supply on budget deficit in Kenya. The study sought to evaluate the significant effect of the selected macroeconomic variables on budget deficit in order to formulate the policy consideration to the economic problem. The study was guided by the Keynesian which was the main theory of the study. The Mundell-Fleming and Ricardian Equivalence theories were also employed as addition theories to back up the study. The study methodology was based on an explanatory design for time series data covering 30 years from 1991 to 2020. Autoregressive distributed lag error correction model (ARDL) estimation was adopted to analyze and infer results of the study. The CUSUM model stability test indicated that the model was stable and the model coefficient was reliable. Diagnostic test results showed there was no autocorrelation (p=0.1510>2.062), no heteroscedasticity (p=0.0903>21.47), and there was no multicollinearity (vif=1.34). Shapiro wilk normality test indicated that the variables of the study were normally distributed. The ADF unit root test indicated that there was unit root and co-integration test confirmed that the variables had a long run relationship. The findings of the study were: interest rate had a positive significant effect on budget deficit in the long run ( β_1=0.0404, <0.05); exchange rate had a positive significant effect on budget deficit ( β_2=0.4189, <0.05); inflation had a negative insignificant effect on budget deficit ( β_3=-0.001, >0.05). Money supply had a positive insignificant effect on Budget deficit ( β_4=0.00004, >0.05). The ARDL long-run results showed that the explanatory variables had Adjusted R2=0.4666 impact on the budget deficit and an F-statistics of 135.5802. The study therefore concluded that interest rate had a positive effect on the budget deficit in the long run. Increasing interest rates in the economy ends up driving budget deficit upwards in the long run. The same was true when the variable of concern is exchange rate. The study findings recommend that there is need for the government to ensure there is stability in macroeconomic variables. This is because there was a significant link between the budget deficit and the selected macroeconomic variables. A strive by the government to reduce budget deficit would mean an adjustment in macroeconomic variables to suit the purpose. These adjustments may include reducing the interest rate in the economy. A reduction in the interest rates in the economy would end up reducing the budget deficit.

The gold price – Inflation relation in the case of Vietnam: empirical investigation in the presence of structural breaks

PurposeThis paper investigates the relationship between domestic gold prices and inflation in Vietnam based on the monthly series of the gold price index and consumer price index over the period of December 2001–July 2020.Design/methodology/approachThe co-integration between the domestic gold price and inflation is examined within the autoregressive distributed lag-error correction (ARDL bounds testing) framework. This paper also applies the vector error correction model (VECM) and impulse response function analysis to explore the causal relationship between these two variables. Moreover, since both gold and inflation series are likely to have structural changes over time, a unit root test controlling for significant breaks is employed in this paper.FindingsFindings from the ARDL bounds testing model suggest the presence of a co-integration between the underlying variables. The VECM indicates that shocks in inflation lead to a negative response to gold prices in the long run. In the short term, only fluctuations in gold prices impact inflation, and this causality is unidirectional.Research limitations/implicationsGold is regarded as a critical financial asset to preserve wealth from inflation pressure in the case of Vietnam. These findings propose implications for both investors and policymakers.Originality/valueEmpirical results suggest that inflation has a long-term impact on gold prices in the Vietnamese market. In the existence of a permanent inflationary shock, domestic prices of gold respond negatively to this shock; hence, gold can act as a good hedge against inflation in Vietnam.

ANALISIS PENGARUH VARIABEL MONETER TERHADAP PERTUMBUHAN EKONOMI DI INDONESIA

The purpose of the analysis in this study is to determine the effect of the relationship between inflation, foreign exchange rates, and the money supply (M1) on economic growth in Indonesia. The model used is ARDL-ECM (Autoregressive Distributed Lag-Error Correction Modelm with time series data as many as 30 objects studied, starting from 1991 to 2020. In the use of data from the World Bank, one data from the Indonesian Ministry of Trade, and other sources. This study concludes that the inflation variable in the long term has a positive effect and is related to economic growth. The exchange rate variable gives the result that in the long term and short term it has a negative effect and is not related to economic growth. Finally, the M1 variable in the long-term model produces a positive influence and is related to economic growth, then in the short term it has a negative influence and is not related to economic growth in Indonesia.

DRIVERS OF AGRICULTURAL FOREIGN DIRECT INVESTMENT AND ITS IMPACT ON FOOD PRODUCTION IN NIGERIA

Foreign Direct Investment is one of the growth promoters in many sectors of the economy including the agricultural sector. The study analysed the drivers of agricultural FDI and gauge its impact on food production in Nigeria. Annual time series data spanning from 1975 to 2017 were obtained from Central Bank of Nigeria, National Bureau of Statistics and World Bank’s Development Indicators Database. Descriptive analysis, stationarity analysis with Augmented Dickey Fuller and Philip Perrons’ unit root tests, co-integration test with Autoregressive Distributed Lag Bound test, Autoregressive Distributed Lag-Error Correction Model analysis were done to obtain results for the study. ARDL-ECM results showed that GDP at P≤0.1, government expenditure on agriculture at P≤0.1, inflation rate at P≤0.01 and real exchange rate at P≤0.01 levels of significance were the significant determinants of FDI inflow to agricultural sector in Nigeria in the long run model. In the short run, GDP at P≤0.1, government expenditure on agriculture at P≤0.1 and real exchange rate at P≤0.01 levels of significance were the significant drivers of Agricultural FDI in Nigeria. The speed of adjustment (ECM (-)) was 102.74%. Agricultural FDI also had significant long run and short run impact on food production in Nigeria at 1% and 1% levels of significance, respectively. The study concluded that FDI inflow had significant positive impact on agricultural sector in Nigeria. It was recommended that government should promote policies that are directed at employing all promotional resources to attract more FDI inflow to the agricultural sector so as to boost its productivity and contribution to the overall economy of Nigeria.