Error Correction Term Research Articles

DETERMINANTS OF NIGERIA GOVERNMENT AGRICULTURAL EXPENDITURE (1999-2020): EVIDENCE FROM VECTOR ERROR CORRECTION MODEL APPROACH

The study focused on the determinants of government agricultural expenditure in the long and short run from 1999-2020 using Vector Error Correction Model approach. Annual time series data on agricultural GDP, agricultural expenditure, inflation rate, exchange rate, interest rest, private investment, public investment and foreign direct investment collected from the records of Central Bank of Nigeria and National Bureau of Statistics database were analyzed using inferential statistics (ADF, Johansen co-integration and VECM). The results showed that all the variables co-integrate and were stationary at first difference. In the long run, inflation (1.118415) and private investment (0.004239) were the significant and important variables that determine agricultural expenditure. The coefficient of multiple determination (R2) was 0.925, indicating that 92.5% variation in agricultural expenditure was explained by the variables. The Error correction Term is statistically significant and negative (-0.0278) in the short run indicating a slow speed of adjustment of variables towards equilibrium. In the short run, inflation, private investment and public investment were the important variables that influenced government expenditure. The study concludes that inflation, private and public expenditures influenced government agricultural expenditure significantly and therefore recommend friendly policies to curtail inflation, conducive environment to catalyze private investment and stimulation of public investment to boost agricultural growth.

The Impact of Government Expenditure on Inflation: Evidence from Sri Lanka and India

This study analyses the impact of government expenditure on inflation in Sri Lanka and India from 1977 to 2019, using ARDL Co-integration, Bounds test, Error Correction version of the ARDL model and the Granger Causality test, while employing inflation, government expenditure and interest rates as study variables. Results for both Sri Lanka and India reveal a statistically significant and a positive relationship between government expenditure and inflation in the long run: A 1% increase in government expenditure tends to increase inflation by 0.0793% and 4.6469% for Sri Lanka and India respectively. The coefficient of the Error Correction Term for both countries carry a negative sign and are statistically significant, indicating an adjustment towards equilibrium at a speed of 63.8% and 93.94% respectively, one period after exogenous shocks. Granger causality test indicates a unidirectional causality stemming from government expenditure towards inflation only in the case of Sri Lanka. This highlights Sri Lanka’s need to manage its public expenditure and its impact on money supply in order to achieve price stability. It is advisable for fiscal as well as monetary policy makers to work closely so as to control inflationary pressure on the economy resulting from rising government expenditure.

Investigating the Pollution Heaven Hypothesis and Environmental Kuznets Curve: Evidence from Panel ARDL Approach

This paper investigates the existence of pollution haven hypotheses (PHH) and the Environmental Kuznets Curve (EKC) for top five (China, Canada, Germany, Brazil, And France) carbon dioxide emitter countries during 1990-2018. The current study uses a panel autoregressive distributed lag (PARDL) technique to obtain empirical outcomes. The estimated results demonstrate the error-correction term's significant and adverse impact and the system's conversion to long-run equilibrium following a shock. The results of the short run and long term indicate that carbon dioxide emissions are positively associated with EC (energy consumption) and are statistically significant. For both the short run and long run

Analyzing the Effects of Food Imports on Food Production and Balance of Payments in Nigeria

Abstract Research background: Past measures to increase food production in Nigeria, were not effective enough to curb food imports and increase food production thus leading to a deficit balance of payment for the country and a total neglect of the agricultural sector. Purpose: This study analyzes the effects of food imports on food production and Balance of Payments (BOP) in Nigeria from 1960 to 2020. Research methodology: The Auto Regressive Distributed Lag (ARDL) bound cointegration test procedure is utilized. Results: The empirical results show that food imports adversely affect food production both in the long and the short run. While for the BOP equations, food importation positively affected the country’s balance of payments in the long run. The short run error-correction term coefficients are signed negatively for both the food production and BOP equations. The results show that the gap between the equilibrium values and the actual value of the dependent variables are corrected with speed of adjustment equal to 40% and 85% annually. The stability test result on the food production equation showed that the null hypothesis of no stable residuals in both the short and long run are rejected, while the estimated model is not effective with stable recursive residuals for the BOP equation. Novelty: The study therefore recommends that efforts should be geared towards boosting the country’s food production by encouraging foreign investors’ participation in the agricultural sector.

Investigating the Relationship between Inflation and Economic Growth: A Case of Pakistan

We re-evaluate empirically the relationship in inflation, and economic growth for Pakistan over the period of 1985 to 2019. Using the Autoregressive Distributive Lag (ARDL) method, this study used the Wald and F-Bound test to find out long-term relationships between these variables and investigate the effect of Inflation over Pakistan economic growth and trade. Our result indicates inflation is negatively affecting economic growth and terms of trade in long run. The results showed that a moderate level of inflation is beneficial for growth and trade while high level or double-digit figure inflation harmful for Pakistan economy. According to the results of the study, inflation is away from its equilibrium value. Error correction term”- 0.16” reveals that 16 percent adjustment has been occurred during the year in the short run-in economic growth. This study also shows that inflation and Terms of trade volatility in Pakistan has negative relation. When Inflation increases terms of trade decreases and vice versa. It reveals that a low and stable rate of inflation boost the trade which leads to prosperity of the countrymen while high rate of inflation is detrimental for economic growth and Trade.

The impact of foreign direct investment on environment: evidence from newly industrialized countries.

This research aims to investigate the effect of foreign direct investment on carbon emissions through the panel ARDL method using annual data for the 1990-2016 period for the newly industrialized countries (NICs), including China, Malaysia, Mexico, Philippines, Thailand, Turkey, India, and Brazil. The stationarity of the series was obtained through LLC, IPS, and Fisher ADF panel unit root tests, the cointegration relationship with the panel ARDL-PMG approach, and the causality relationship with Dumitrescu and Hurlin (DH) tests. As a result of the long-term analysis, the foreign direct investment, energy consumption, and trade openness have a positive and significant impact on carbon emissions, whereas economic growth has a negative and significant impact on carbon emissions. The result shows that a percent increase in foreign direct investment increases carbon emissions by 0.03%. As a result of the short-term analysis, it was seen that the coefficient of the error correction term (ECT) was negative and statistically significant. According to DH panel causality test results, there exists a bidirectional causality relationship among energy consumption and carbon emissions, and a unidirectional causality relationship from economic growth and trade openness to carbon emissions and from carbon emissions to foreign direct investment. As policy implication, in industrialized countries especially China and India, there is a greater need to invest in green energy consumption at a larger scale to achieve future sustainable development goals.

Investigating the Efficiency of Bitcoin Futures in Price Discovery

The present study investigates the efficiency of the Bitcoin futures in the price discovery process by assessing the lead-lag relationship between the futures and spot prices of Bitcoin. The study tests whether the Bitcoin futures market is leading the price discovery mechanism for the Bitcoin spot market. The study considers daily closing prices of both Bitcoin spot and future indices from December 12, 2017 to December 31, 2020. The stationarity of the two time-series variables is tested using Augmented Dickey-Fuller test while the long-run co-integrating relationship is tested using Johansen Co-integration test. To test the long-run causality, the Error Correction Mechanism framework (ECM) is used while the Wald test is applied to assess the short-run causality between the Bitcoin future and spot prices. The results of trace and max-eigen statistics indicate that there is long term co-integrating relationship between Bitcoin futures and Bitcoin spot markets. The negative significant coefficient of error correction term indicates that there is long-run causality from the Bitcoin futures towards the Bitcoin spot market. The significant Chi-square test statistics of the Wald test suggest that there is short-run causality from the Bitcoin futures towards the Bitcoin spot market. This shows that the Bitcoin futures market is acting as a leading indicator and the Bitcoin spot market as a lagging indicator. Thus, it is concluded that the price discovery is taking place between Bitcoin futures and the Bitcoin spot market. With the entrance of the new information in the cryptocurrency market, it is first observed in the Bitcoin futures followed by the Bitcoin spot prices.

How Does Oil Future Price Imply Bunker Price—Cointegration and Prediction Analysis

This paper investigates how oil’s future price implies the bunker price through cointegration analysis first. A cointegration test confirms the long-run equilibrium condition of bunker and oil future prices. Based on the cointegration relationship, we construct VECM model to forecast bunker prices. In addition, we also consider ARMA, ARMAX, and VAR models for certifying whether considering the long-run equilibrium between bunker and oil future prices is helpful in prediction. One-step-ahead and four-step-ahead forecasting are considered and two out-of-sample datasets are used. The empirical results show that the increase in the value of the error correction term in the VECM model has the effect of pulling down the bunker return. VECM performs better than other models in prediction. The Crude Oil Future Contract 1 has better forecasting performance for bunker prices with VECM in the 1-step-ahead forecast, while Crude Oil Future Contract 3 performs slightly better than Crude Oil Future Contract 1 in the 4-step-ahead forecast.

REAL EFFECTIVE EXCHANGE RATE AND IMPORT OF GOODS AND SERVICES LINKAGE IN NIGERIA: AN IMPACT ANALYSIS

This paper assessed the influence of real effective exchange rate on import of goods and services in Nigeria over the period, 1986-2020. The Error correction model estimation was applied in estimating the multiple regression model. The findings showed that the real effective exchange rate is negative and statistically significant effect on the exports of goods and services in Nigeria. Expectedly, the convergence coefficient or error correction term (ECT) is negatively signed and significant, which suggests that last-period’s deviation from a long-run equilibrium influences its short-run dynamics as is being corrected at a speed revealed by the parameter estimate. Thus, the speed of adjustment (or error correction term) shows that deviation from equilibrium relationship is corrected at the speed of 56% on annual basis. We recommend that we recommend that if the Nigeria wants to focus on import, the currencies should be devalued/depreciated because they are relatively elastic to changes in real exchange rate. Keywords: Exchange Rate, Error Correction Model, Imports, Goods, Nigeria.

Estimating energy efficiency using panel stochastic frontier approach: investigating its asymmetric impacts on employment in India

PurposeThis study aims to examine the asymmetric effects of energy efficiency on employment in India. Instead of relying on partial factor energy efficiency measures, this study uses a total factor energy efficiency (TFE) measure to estimate sector-specific energy efficiency for empirical investigation.Design/methodology/approachMulti-sectoral panel data for India from 2000 to 2014 are considered for empirical estimation. The sector-specific energy efficiency estimates (using the TFE measure) are estimated in the initial stage using the stochastic frontier approach (SFA). Then the asymmetric effect of energy efficiency on employment is investigated by using a non-linear panel autoregressive distributed lag model.FindingsThe estimates of energy efficiency display that there is not much significant change in the trend of average energy efficiency over the period. The negative and statistically significant value of the error-correction term confirms the existence of asymmetric cointegrating relationship between energy efficiency and employment in India. Moreover, in the empirical findings, the positive and negative shocks in energy efficiency provide a long-run asymmetric and short-run symmetric effect on employment in India.Originality/valueRather than depending on the absolute measure of energy efficiency (energy to output ratio), this study estimates the sector-specific energy efficiency for India using panel SFA, which provides a relative measure of energy efficiency. Moreover, to the best of the authors’ knowledge, it is the first empirical study investigating the asymmetric impact of energy efficiency on employment at an aggregate level in developing countries like India. By contrast, previous studies have either concentrated on the symmetric effect of energy efficiency on employment or primarily restricted to developed countries.

The asymmetric influence of renewable energy and green innovation on carbon neutrality in China: Analysis from non-linear ARDL model

Adopting green technology and renewable energy is imperative to address climate challenges and realize sustainable development goals. Therefore, this study examines the impact of green innovation and energy consumption on carbon emissions in China from Q1-1990 to Q4-2018. Due to several technological and economic shifts in recent eras, Chinese macro-economic data shows an abnormal distribution, and traditional linear estimators failed to integrate non-linearity. In response, this study employs a non-linear autoregressive distributed lag (NARDL) framework to address non-linearity arising from abnormal data distribution. The overall results reveal that positive shocks in green technology significantly mitigate carbon emissions by 0.262%, while negative shocks increase emissions by 0.104%. Similarly, positive shocks in renewable energy consumption caused a 0.360% reduction in carbon emissions, while negative shocks increased emissions by 0.424%. In contrast, a positive change in non-renewable energy consumption leads to 0.139% higher emissions. However, in a negative shock, this effect turns stronger and spurs carbon emissions by 0.246% in the long run. These findings confirm the asymmetricity because positive and negative shocks in regressors distinctly affect carbon emissions in China. Finally, population and economic growth contribute to higher emissions by 0.872% and 0.685% in the long run, respectively. Moreover, the error correction term confirms the long-run steady-state equilibrium convergence by 11.5% in the case of any shock in the short run. These results indicate that the Chinese government should promote green innovation and renewable energy policies based on their asymmetric emissions-reduction effects.

A GARCH Study on Exchange Rate Determinants: A Case of Malaysia

The study aims to look at macroeconomic variables’ impact on volatility of exchange rate in both short and long run. The relationship between real effective exchange rate volatility and macroeconomic variables such as gross domestic product deflator, total export in percentage of GDP, inflation rate, coefficient of inflation rate and lending interest rate have been analyzed with the help of statistical tool. This research is based on secondary data obtained from World Bank website, International Monetary Fund website and Statistical Department of Malaysia. The study uses a sample of 35 observations, starting from 1980 to 2014 annually. Unit root test is used to determine the stationarity of the variables. The existence of the stationary data will lead to a long run relationship of macroeconomic determinants, while the techniques of co-integration model are used to determine the long run relationship of some macroeconomic variables on the volatility of exchange rate. The error correction model is used to generate a short run model on this study by generating residual or error correction term. The findings revealed that the coefficient of the gross domestic product deflator, total export in percentage of GDP, and inflation rate are significant toward the volatility of real effective exchange rate in the long run. On the other hand, only the coefficient of inflation rate, and lending interest rate have significant relationship with the real effective exchange rate volatility in the short run.

The Impact of Economic Growth on Gender Inequality in Ethiopia

The main objective of this study was to investigate the impact of economic growth on gender inequality in Ethiopia using time series data collected from UNDP and World Bank Development Indicators during the period 1985 to 2018. The Auto-regressive Distributed Lag (ARDL) Approach to Co-integration was applied in order to investigate the long-run relationship between gender inequality and economic growth, trade openness and government expenditure. The Bounds test shows that there is a stable long run relationship between the variables included in the study. The finding show the error correction term of the short run is statistically significant having desirable negative coefficient to restore equilibrium in dynamic model between short run and long run. The results of the study revealed that government expenditure found to have a negative significant effect on gender inequality, but economic growth and trade openness have a negative insignificant effect on gender inequality in the long run. Therefore, national policies designed to stimulate economic growth or to open up the economy to FDI should meet the requirement to equalise access to jobs for men and women, enhance the expansion of women’s access to economic opportunities relative to men, ease scarcity-related constraints which put pressure on households to discriminate against women and making pro-poor and gender-equitable government expenditures. Keywords: Gender inequality, Economic Growth, Trade Openness, Government Expenditure, ARDL DOI: 10.7176/RHSS/12-7-04 Publication date: April 30 th 2022

Economic Growth, Financial Development, Energy Consumption and Life Expectancy: Fresh Evidence from ASEAN countries

The study examines the relationship between economic growth and life expectancy by considering the potential role of financial development and energy consumption in ASEAN Countries. Unit root testing was applied to check the level stationarity data before checking for cointegration between variables using the Error Correction Term (ECT) approach, and ARDL bounds testing was applied for cointegration with structural damage that occurred at a specific time using the Pooled Mean Group (PMG) and Pooled Mean Group (MG). The empirical results showed the existence of cointegration among variables. PMG was selected based on Hausmann Test that indicated energy consumption could significantly and positively affect life expectancy. Therefore, ASEAN countries would be extensively dependent on non-renewable energy to generate their economic activities in the long run. In contrast, in the short run, higher economic growth can reduce life expectancy in most developing countries, as energy consumption is examined to affect life.

Driving green bond market through energy prices, gold prices and green energy stocks: evidence from a non-linear approach

One of the most controversial concerns among the researchers is the expansion of the green bond markets, so as to reduce environmental pollution. The present study estimates the factors that help drive the global green bond markets, such as energy prices, gold prices, and green energy stocks. The study has applied Quantile Autoregressive Lagged Approach (QARDL) and Quantile Granger Causality test to estimate the causal relationship among the variables for January 2010 and June 2021. The QARDL findings reveal that for all the quantiles, the error correction term is statistically significant with the predicted negative sign. This confirms the existence of a strong long-run equilibrium relationship between the relevant variables and the green bonds market on a global level. The findings revealed that gold and energy prices have a lower effect on the green bonds market on every quantile, and also from the low to medium quantiles, respectively. While at the same time, the green energy stocks have an increasing effect on the green bonds market at higher quantiles. The results of the causal examination using Granger-causality in quantiles show a bi-directional causal relationship between the green bonds, energy prices, gold prices, and green energy stocks in the world economy.

Import Behavior Analysis of Air Cargo: Focusing on Machinery, Transport Equipment and Miscellaneous Manufactured Products

Purpose This paper aims to analyze the import behavioral pattern of air cargo and its determinants using exchange rate and domestic industrial production. Design/Methodology/Approach This paper utilizes a cointegration procedure, error correction equation, forward rolling regression, and impulse response function. We use monthly data for real effective exchange rates, export values, and the domestic industrial production index for the period of January 2009 to December 2020. Sectoral import statistics used in this study are taken from the Korea International Trade Association database for three digit SITC items. Findings The unitroot and the Engle-Granger cointegration tests show that all six variables are non-stationary at levels, but stationary after differencing, and that our model is stationary. The error correction terms, which range from 0.168 to 0.277, are significantly negative. These results imply that the disequilibrium of air cargo import need four or six months for long-run equilibrium at a tolerable pace. The rolling regression indicates that the paths of SITC776 and SITC764 are different from those of SITC728 and SITC874. The impulse response technique shows that both the real effective exchange rate and domestic industrial prodution affect the imports of the four products positively. Research Implications The empirical results that air cargo imports respond to the economic variables such as exchange rate and economic business in line with expectations suggest that air cargo imports are predictable. In addition, the fact that the adjustment speed toward the trend is fast means that the stable growth of the air cargo import are guaranteed. However, we notice that the negative effects of the exchange rate decay slowly.

On the Sustainability of Fiscal Policy in Sierra Leone

The aim of this paper is to empirically investigates whether Sierra Leone fiscal policy is sustainability. In this regard, I employ different econometric methodologies used in the empirical literature to investigates the sustainability of fiscal policy. The empirical findings that emerged from this study are useful on one hand to creditors, serving as a guide for lending to the government, and, on the other hand to the government, cautioning policymakers to avoid public debt from exploding that could possibly lead to fiscal insolvency and/or debt distress. I start by testing for the stationarity properties of the primary balance, the necessary condition for a sustainable fiscal policy. The findings indicated that Sierra Leone fiscal policy is sustainable under the review period. Next, I test for cointegration relationship between government revenue and government expenditure, the alternative approach to test for a sustainable fiscal policy. On this note, I employ both the Dynamic Ordinary Least Square (DOLS) and the Johansen cointegration techniques. Both approaches confirmed the existence of a cointegration relationship between government revenue and government expenditure. The estimated cointegration coefficients show that fiscal policy during the review period is weakly sustainable and the cointegration between government spending and revenue is positive (but less than one) and statistically significant. This implies that for each percentage point of GDP increase in government expenditure, government revenues increase by less than one percentage point of GDP. Additionally, I proceeded to endogenously account for structural breaks in the cointegration relationship, which is relevant for Sierra Leone, a country that has witnessed significant changes over the years, including the Structural Adjustments Programme (SAP) in the 1980s, tax reforms in the 1990s and 2000s, etc. I found evidence of a significant structural break occurring in 1984. There also exists uni-directional causality running from government revenue to government expenditure. This causality result is in line with the tax-and-spend hypothesis as proposed by Friedman (1978).Finally, I estimate an error correction model and the error correction term shows that the speed of adjustment from the expenditure side works faster than that of the revenue side to correct the fiscal disequilibrium.

US Fiscal Stimulus and Value of Dollar

Our study examines the impact of government stimulus spending on the US dollar’s exchange rate. We apply the VECM model on US data from 1980 to 2020 with US dollar’s exchange rate as the dependent variable and the quantity of domestic money supply, amount of domestic government purchases, quantity of money supplied by the foreign country (China), and the foreign country’s output as independent variables. Our study finds that, while the long-run impact of US fiscal stimulus spending on the dollar’s exchange rate is negative, it has no effect in the short run. Also, the coefficient associated with the error￾correction term, ECT, is negative but insignificant at 5% significance level, which implies that any short￾term fluctuation in the US dollar’s exchange rate will not be adjusted toward its long-run value.

Liquidity risk in economic uncertainty: Evidence from Indonesian Islamic banks

Purpose – This paper aims to analyze the effect of economic uncertainty on liquidity risk of Islamic banks in Indonesia by observing the impact of economic uncertainty (World Uncertainty Index), macroeconomic factors (GDP Growth and Inflation Rate), and bank-specific factors (CAR and ROA) on liquidity risk.Methodology – Using time-series quarterly data from OJK’s Islamic Banking Statistics 2015-2021, this research applies Auto-Regressive Distributed Lag (ARDL) and Error Correction Term (ECT) to see the long-term impact and short-term response of economic uncertainty, inflation rate, GDP growth, ROA and CAR on liquidity risk of Islamic Bank.Findings – This research finds that economic uncertainty has a positive and significant effect on liquidity risk in the short term and long term. It means the increase in uncertainty index caused by the crisis, war, or pandemic like nowadays will enhance the liquidity risk of Islamic banking. At the same time, the inflation rate has a significant negative effect on liquidity risk in the short-term and long term.Originality – This research uses a combination of macroeconomic variables and bank-specific factors, and the economic uncertainty variable from the World Uncertainty Index. In this case, one of the reasons for liquidity problems apart from fund management failure is unfavorable economic conditions. In addition, this study also provides several recommendations in maintaining banking liquidity risk.Research limitations – This study uses time-series data with a limited period (2015Q1-2021Q2). In addition, this uses cumulative data on Islamic banking in Indonesia; thus, it does not describe the conditions in each Islamic bank, although certainly there are some different conditions between each other. Therefore, it is hoped that studies will complement these limitations in the future.

Sustainability assessment of crops' production in India: empirical evidence from ARDL-ECM approach

PurposeThe study aims to evaluate the long- vs short-run relationships between crops' production (output) and crops' significant inputs such as land use, agricultural water use (AWU) and gross irrigated area in India during the period 1981–2018.Design/methodology/approachThe study applied the autoregressive distributed lag (ARDL) bounds testing approach to estimate the co-integration among the variables. The study uses the error correction model (ECM), which integrates the short-run dynamics with the long-run equilibrium.FindingsThe ARDL bounds test of co-integration confirms the strong evidence of the long-run relationship among the variables. Empirical results show the positive and significant relationship of crops' production with land use and gross irrigated area. The statistically significant error correction term (ECT) validates the speed of adjustment of the empirical models in the long-run.Research limitations/implicationsThe study suggests that the decision-makers must understand potential trade-offs between human needs and environmental impacts to ensure food for the growing population in India.Originality/valueFor a clear insight into the impact of climate change on crops' production, the current study incorporates the climate variables such as annual rainfall, maximum temperature and minimum temperature. Further, the study considered agro-chemicals, i.e. fertilizers and pesticides, concerning their negative impacts on increased agricultural production and the environment.