Long-run Cointegration Relationship Research Articles

Intensity of shock transmission amid US-BRICS markets

Purpose – The purpose of this paper is to analyze the intensity of transmission of shocks from USA to BRICS countries in the long-run and short-run deviations and swiftness of recovery during US subprime mortgage crisis. This analysis enables the authors to explore the evolving patterns of relationships between these markets and examine whether their co-movements altered either in response to international shocks that originated in advanced markets like USA or due to their domestic fluctuations. Design/methodology/approach – Employing data of daily stock market indices (open and close) of BRICS countries for the period January 2, 2001 to May 31, 2012, this paper examines the interactions and characteristics of price movements of BRICS with US market by applying co-integration tests, vector error correction model and Granger causality relationship. The daily stock market indices data are derived from respective stock exchange web sites. Findings – The results exhibit that both long-run co-integration relationships and short-run Granger causality relationships exist between the stock markets of US-BRICS. Furthermore, this nexus is amplified in the short-run during 2007-2009, when the subprime mortgage financial crisis in the USA cropped up. This finding lends support to the prominence of developed (US) market links in the proliferation of persistent co-movements of BRICS stock markets. Research limitations/implications – The findings imply an increasing degree of global market integration due to quick dissemination of global shocks originating from developed market like USA, and swift recovery which can be attributed to the increased resilience, consistent with the moderated level of domestically driven risk in the BRICS markets. In spite of their similarities, long-run and short-run interdependences with the US stock market exhibit differences among the BRICS. This can be attributed to the regional heterogeneity in long-run risk and return co-movements with the USA. Practical implications – Changes from the US index easily affect these stock markets in the short-run, which implies that the US index may act as a leading indicator for investing funds in BRICS markets. Originality/value – This study would enable the authors to understand whether BRICS economies actually remain resilient to adverse developments in USA and could serve as alternative investment destinations for global portfolio diversification.

Do oil spot and futures prices move together?

This paper investigates the time-varying correlation and the causal relationship between crude oil spot and futures prices using a newly developed approach — wavelet coherency analysis in time–frequency domain. First, we find evidence of a long-run cointegration relationship between oil spot and futures prices. Moreover, the short-run causality is more significant in shorter maturity pairs versus longer maturity pairs in the vector error correction framework. Second, the results from wavelet coherency analysis show significant dynamic correlations between variables in the time–frequency domain. Third, the illustration of the phase-difference series around zero suggests that spot and futures prices contribute to the dynamics of the long-run equilibrium. Fourth and finally, we provide reasons for the structural changes in oil prices and also recommend investment strategies corresponding to risk diversification. Future studies focusing on the behavior of oil prices should consider the characteristics of the time–frequency space and lead–lag dynamic relationships.

Nexus between electricity consumption and economic growth: a study of Gibraltar

In this paper, we examine the long-run cointegration relationship between electricity consumption and GDP per capita in Gibraltar over the period 1996–2012. We examine the short-run and long-run and the causality nexus. The results show electricity consumption has a long run association with the output per capita at levels. Moreover, we note a statistically significant coefficient of electricity consumption the short run (0.53) and in the long-run (1.46). Moreover, a unidirectional causality running form electricity consumption to GDP per capita is noted. Hence, electricity consumption causes income growth in the economy and therefore we recommend efficient use of electricity consumption in key productive sectors of the economy as a way forward to spur growth in the small semi-sovereign economy of Gibraltar.

Government Fiscal Efforts vs. Labour Union Strikes. Strategic Substitutes or Complements?

To unveil the strategic interaction between the government and the labour union in a unionised economy, a policy-game model is estimated by cointegrated Vector Autoregressive system using Italian quarterly data (1960-2009) on government budget surplus (fiscal efforts), hours not worked (strikes), unemployment and real wages. The long-run cointegration relationships are interpreted as the players' reaction functions and the long-run equilibrium as the equilibrium of the game. The identification of the long-run cointegration relationships allows indeed to determine if efforts and strikes are strategic complements or strategic substitutes. Finally, speed of long-run adjustment provides insights about the effectiveness of government and labour union strategies.

Dynamic heterogeneous panel analysis of the correlation between stock prices and exchange rates

This article uses quarterly data from 29 countries, during the period from the first quarter of 2000 to the second quarter of 2011, and the Pooled Mean Group (PMG) method to estimate the dynamic heterogeneous panel data model and to verify the correlation between stock prices and exchange rates. According to empirical results, the stock market and the foreign exchange market have a long-run co-integration relationship. In the short-run, the stock market and the foreign exchange market are negatively correlated, supporting the viewpoints of the portfolio approach. However, using the error-correction adjustment process, the long-run relationship between the two is positive, supporting the results of the traditional approach. This study suggests that the viewpoints of both the portfolio approach and the traditional approach can co-exist through long- and short-run adjustments.

Price formulation and the law of one price in internationally linked markets: an examination of the natural gas markets in the USA and Canada

The degree to which the law of one price holds (integration) along with determining each individual markets’ role in price discovery is examined for 11 major natural gas markets, six from the USA and five from Canada. Deregulation, technological advances, and trade agreements have opened the USA’s and Canada’s natural gas market to new and extensive interactions. The 11 natural gas market prices are tied together with ten long-run co-integration relationships with all markets included in the co-integration space, providing evidence the markets are integrated. The degree of integration varies by region. Markets geographically adjacent to each other tend to be more highly integrated than markets separated by distance. Further results indicate that there is no clear price leader among the 11 markets. Including more US and Canadian markets than previous studies, show markets in both eastern and western USA and Canada are important in the price discovery process.

Real Sector Bank Credit: Sustainable Driver of GDP?

In standard error correction models GDP and credit share a long-run cointegration relationship with causality running from GDP to credit. The models are inconclusive about the question whether credit has also a positive impact on GDP. A reason for the mixed effects is the dual nature of credit, having a potential for both supporting economic growth and jeopardizing financial stability. This paper shows that disentangling the two forces by looking at disaggregated credit data broken down by sector of economic activity and distinguishing between credit directed to the real sector and credit directed to the financial sector is instrumental. In an error correction model using quarterly German credit data from 1980-2012 and focusing on bank credit to real sector companies only, a cointegrating relationship between GDP and credit is found with causality running from credit to GDP.

Economic growth and human development – what do time series data say for Sudan?

This study examines United Nations Development Programme (UNDP)'s 1996 hypothesis regarding the existence of a two-way relationship between economic growth (EG) and human development (HD) using Sudanese time series data (1960–2012). The hypothesis suggests that there is a feedback effect between HD and EG. This implies that improving HD could enhance EG opportunities and vice versa. In this study, first we analyse the long-run cointegration relationships using the Autoregressive Distributed Lag (ARDL) approach. Then, to identify the short-run dynamic relationship between HD and EG, we employ the error correction model derived from the ARDL. The results show that in the long run, HD is positively related to EG through education and employment performance channels. At the same time, EG could positively improve the opportunities for the education of households and involvement in economic activities. The short-run dynamic estimation confirms that there is a bidirectional relationship between EG and HD. The overall findings support UNDP's 1996 hypothesis concerning the existence of a two-way relationship between EG and HD. The results also confirm that improving humanity in Sudan promotes not only HD but also overall economic development.

A Study of the Relationship between Renminbi Exchange Rates and Chinese Stock Prices

This study examines the relationship between Chinese renminbi (RMB) exchange rates and Chinese stock prices over the full study period of 20 July 2001 to 21 July 2011. The study also investigates the relationship between the exchange rate and ten industry-specific indices. Also examined is the effect of two specific events on the ‘exchange rate/stock price’ relationship: (1) the easing of exchange rate controls, and (2) the 2008 start of the global financial crisis. A long-run cointegration relationship is found during the full study period between exchange rates and the Shanghai A-share prices, and for nine of ten industry indices. Granger causality in one direction (i.e., from exchange rates to stock prices, or vice versa) or both directions is found for four of the industry-specific indices. Interestingly, both a long-run cointegration relationship and Granger causality are only found during the most volatile period of managed exchanged rates before the global financial crisis. Implications for Chinese monetary policy makers and global investors are provided.

Determinants of the real effective exchange rate in the Russian Federation

This article examines the main determinants of the Russian real effective exchange rate (REX) movements over the transition period started in the early 1990s. To understand the forces that drive exchange rate dynamics, five strands of the empirical literature have been combined ina time series dimension. The results suggest a positive long-run cointegration relationship between the REX, oil price, productivity and government financial position and a negative relation with international reserves. Managing international reserves and fiscal policies have therefore, the effect of mitigating the impact of oil/terms of trade and productivity shocks on the REX.

Fiscal decentralization, local government competition and farmland conversion in China: the co-integration analysis and the GMM estimation based on the inter-provincial panel data

Based on the Chinese provincial panel data from 1995 to 2008, using the panel co-integration method, this paper presents an empirical study on the long-term equilibrium relationship between the fiscal decentralization, the local government competition and the farmland conversion. On this basis, establishing the dynamic panel data model, using the generalized method of moments (GMM) to analyze the dynamic impact of the fiscal decentralization and the local government competition on the farmland conversion from the view of three cross-regional groups and the mainland China. The results show that there is a long-run co-integration relationship between the fiscal decentralization, the farmland conversion and the local government competition, and also there is a positive significant influence of the fiscal decentralization and the local government competition on the farmland conversion, a 1% increase in the degree of fiscal decentralization will increase the area of farmland conversion by 0.3280%. In addition, there is a significant difference of the incentive effect of local government competition on the farmland conversion in different regions. The paper ends with policy suggestions for perfecting the system of the fiscal decentralization, taxation and the division of responsibility and authority, reforming the criterion of the political achievement assessment, strengthening the management of land revenue, reducing the reliance of the local government on land finance; at the same time, the farmers’ land property rights should be perfected.  

Asymmetric Dynamic Interrelationships among the Greater Chinese, Japanese and US Stock Markets

Over the past decade, empirical studies have not found any evidence of cointegration relationships between the A-shares in the Shanghai/Shenzhen markets and the other indexes in foreign markets. However, by performing an asymmetric cointegration test, we surprisingly find a strong long-run asymmetric cointegration relationship linking A-shares in the Shanghai/Shenzhen markets with either the Hang Seng index or the Taiwan index, thereby confirming the concept of a Greater Chinese stock market. On the other hand, we find an insignificant long-run asymmetric cointegration relationship between the S & P500/Nikkei 225 and the A-shares in the Shanghai/Shenzhen markets. The asymmetric dynamic inter-relationships can provide an interesting point of view.

Effects of energy consumption on per worker output: A study of Kenya and South Africa

The paper investigates the long-run cointegration relationship and energy elasticities for Kenya and South Africa over the periods 1978–2009 and 1971–2009, respectively, using the ARDL procedure developed by Pesaran et al. (2001) with recomputed critical bounds from Narayan (2005) and the Solow (1956) framework extended by Rao (2010). We also conduct the (Toda and Yamamoto (1995) test for Granger non-causality. The regression results show that short-run and long-run energy elasticities are 0.50 and 1.71, respectively for Kenya and 0.17 and 0.34, respectively for South Africa. The causality results indicate a unidirectional Granger causality running from capital per worker and energy per capita to output per worker for both countries. Moreover, in Kenya, we detect a strong unidirectional causality: (a) on output from joint consideration of capital stock and energy; and (b) on capital stock from joint consideration of energy and output. In South Africa, the joint causations are neutral. Hence, while energy and capital stock spurs growth in both countries, Kenya has a greater potential to harness growth and capital productivity via joint consideration of energy with capital and output, respectively.

GDP Fluctuations and Private Investment: A Study of Selected South Asian Countries

The current study examines the relationship between GDP fluctuations and private investment by using macro panel approach in a panel of five selected South Asian countries (SSAC) including Bangladesh, India, Nepal, Pakistan and Sri Lanka for the period of 1980-2010. The study applies modern non-stationary panel techniques such as cross section dependence test, unit root test under cross sectional dependence, panel cointegration and Group Mean Fully Modified OLS (GM-FMOLS) estimation.The study finds a long-run co-integrating relationship between GDP fluctuations and private investment in the SSAC. GM-FMOLS estimates show that this link is negative. Thus, the results indicate that GDP fluctuations have a significant negative impact on private investment in SSAC as GDP volatility gives a negative signal to private investors. The study also suggests that GDP volatility may be harmful for private investment in developing countries and negative effect on private investment will also be transferred to growth as the investment is a key determinant of growth. So, the governments of developing countries should equally focus on managing the volatility of GDP to increase private investment along with other measures for creating an investment-friendly environment. Additionally, an increase in private investment will further help in maintenance of stability.

Tax Structure and Economic Indicators in Developing and High-income OECD Countries: Panel Cointegration Analysis

This paper investigates the long-run relationship between tax structure and economic growth and the other economic indicators via panel unit root tests and panel cointegration analysis. Panel unit root tests are carried out to determine the order of integration of panel variables. In order to find out the long-run cointegration relationship, we employ the Kao residual cointegration test. The results of panel cointegration test reveal that there is no long-run cointegrating relationship between tax structure and both of GDP and gross saving (SAVING) in developing countries. Yet, there is an evidence of a strong cointegrating relationship among tax structure and international trade's activities. Conversely, for high-income OECD countries, Kao's test suggests that there is a long-run cointegrating relationship between components of tax revenue and GDP and gross saving, while there is no evidence for imported and exported of goods and services (international trade).

Deconstructing Service and Investment Negotiating Stance: A case study of India at WTO GATS and Investment Fora

While India has gradually embraced a unilateral liberal policy on the limit of inward foreign investment in the country, its negotiating position on the same at the multilateral forum, i.e., WTO, is still comparatively defensive. The key question raised by the current analysis is, whether India is right to adopt a hard negotiating stand at WTO on investment issues, covered under GATS Mode 3 and Trade and Investment Negotiations. An associated concern is whether a softening of India’s present standpoint is expected in coming future. For this purpose, the current study explores the long-run co-integrating relationship between India’s FDI and economic growth, in addition to exploring their direction of causality applying Granger causality test. The obtained empirical results lead to the following observations. First, regarding the question of the justifiability of the Indian standpoint, it is observed that though foreign investment inflow in the country continues to benefit several sectors through backward and forward linkage effects, the role of FDI on overall growth has not been statistically significant. Second, it can be concluded from the findings of the Granger causality test that a number of foreign investors has targeted India in recent period, given the high growth rate witnessed by Indian economy even in the aftermath of the 2009 recession vis-à-vis other developing economies. We conclude that India’s present standpoint at WTO negotiations on investment reflects the uncertain trade-off between growth repercussion expectations from the incremental FDI inflows resulting from the additional multilateral commitments. Therefore, a quick transformation of the present negotiating standpoint is not expected in India’s case.

Energy Consumption And Economic Growth In China: New Evidence From The Co-Integrated Panel VAR Model

This study is conducted to explore the relationship between energy consumption and economic growth in China over the period 1995-2010 using the panel time-series techniques under a multivariate framework. The results reveal that there are long-run co-integration relationship among variables real GDP, energy consumption, capital formation and labor force. Furthermore, based on the panel VEC model, there is bidirectional causality between economic growth and energy consumption, which is consistent with the growth hypothesis in terms of the energy consumption-growth nexus. The unidirectional causality from capital formation to energy consumption reveals that energy consumption cannot affect economic growth through capital formation. Additionally, real GDP, energy consumption, capital formation and labor force each respond to short-run deviations from long-run equilibrium with a slow adjustment speed. Finally, by estimating the panel VAR model, it is found that the responses of real GDP to a shock of energy consumption are negative, whereas the shock of real GDP changes is positive with most of the energy consumption response being absorbed during the six years. By variance decompositions derived from the orthogonalized impulse-response coefficient matrices, a shock in the energy consumption takes the biggest effect on real GDP in both short-run and long-run.

Analysis of exchange rate fluctuations and external debt: Empirical evidence from Pakistan

The primary purpose of this study is to examine the relationship, with respect to the Pakistani economy, between exchange rates and external debt by utilizing quarterly data from the 1983:Q1 to 2008:Q4 period. Short-run and long-run nominal and real effective exchange rates and their respective equilibrium rates have been assembled. The long run equilibrium exchange rate has been determined by employing the natural real exchange rate (NATREX) model suggested by Stein et al. (1990). We applied the Johanson (1988) cointegration test to examine the long run cointegration relationships among exchange rates and the relevant exogenous variables in the Natrex model. After computing the deviation of exchange rate from its long run, the autoregressive distributive lag model (ARDL) was applied to examine the role of external debt in the fluctuation of exchange rate. The results suggest that there is a long-run cointegration relationship among the relevant variables in the Natrex model and there is a long run cointegration relationship between the exchange rate and external debt variables. We also checked the stability of the functions and performed diagnostic tests. Most of the tests suggested that the functions adopted for the analysis are appropriate and stable over time. Moreover, the obtained results are robust and in according to the predictions of the model. Key words: Exchange rate, external debt, autoregressive distributive lag model (ARDL), methodology.

Export-led Growth in India and the Role of Liberalisation

The literature on export-led growth in India is voluminous but inconclusive. This study re-examines the export–output relationship over the 1960–2009 period, and finds strong evidence of export-led growth for India. While there is no long-run cointegration relationship between India’s exports and output, tests of causality and impulse responses show a significant positive impact of export growth on output growth in the short run. Autoregressive models of India’s output growth also reveal the significant role of export growth over the same period. This result remains robust regardless of testing exports with different measures of output. The short-run impact of export on output, however, becomes insignificant in all types of estimation once the sample is reduced to the pre-liberalisation era from 1960 to 1991. Hence, liberalisation appears to have significantly contributed to export-led growth in India. We work with quarterly data as well over the liberalisation regime from 1996Q2 to 2010Q4 and find consistent results on export-led growth for India. Thus, export-led growth appears to be a liberalisation phenomenon for India. These findings have implications for other developing economies that aspire to grow fast but confront dilemmas with trade liberalisation policy. JEL Classification: F41, F43, C32, O53

UNEMPLOYMENT AND SPEED OF ADJUSTMENT IN ASEAN-3 ECONOMIES: A COINTEGRATION ANALYSIS

This paper investigates the existence of long-run relationship between unemployment and several key macroeconomic variables in Malaysia, Singapore, and the Philippines. The Johansen–Juselius cointegration method confirms the existence of a stationary long-run cointegration relationship between unemployment and its determinants in all three countries. Exports and foreign direct investment are important determinants of unemployment in Malaysia. In the Philippines, government spending and exports are inversely related to unemployment. In Singapore, only exports appeared as a significant factor in determining unemployment. The results show that the speed of adjustment following a shock is more rapid in Singapore compared to the other two ASEAN countries.