Error Correction Model Methodology Research Articles

Monetary Policy Dynamics and Economic Growth: An Empirical Analysis of Indonesia's Economy using Time-Series Data and Error Correction Model (ECM)

This study investigates the relationship between monetary policy variables and GDP growth in Indonesia using time-series data from 1986 to 2021. Employing the Error Correction Model (ECM) framework, the research explores the presence of a long-run relationship among the variables and identifies significant monetary policy instruments that drive economic growth. The findings reveal a robust long-run relationship between monetary policy variables and GDP growth, indicating the sustained impact of monetary policy on Indonesia's economic performance. Specifically, the core finding highlights the significance of the inflation rate, exchange rate, and total reserves as influential monetary policy instruments driving growth in Indonesia. This finding helps policymakers better understanding about the relationship between monetary policy and economic development in the context of Indonesia by offering insightful information. By utilizing an extensive time-series dataset and employing the ECM methodology, this study contributes to the existing literature on the role of monetary policy in shaping economic growth, particularly in Indonesia.

Revenue allocation in Nigeria: implications for sustainable national development

This study examines the structure and formula for revenue allocation in Nigeria and highlights its implications for sustainable national development. The work uses the methodology of Error correction model (ECM) in conjunction with diagnostic tests of variables using Johansen Co-integration tests for robust policy recommendations. Using the Gross Domestic Product (GDP) as the dependent variable and Revenue allocation to the three levels of government, inflation, and lending interest rate as the independent variables, the results from the study show that revenue allocations and the other variables have a significant relationship with economic growth in Nigeria. Based on our findings, the study recommends among others that there should be accountability and transparency in the federating units to achieve national goals and objectives. Various levels of government should be given adequate funds to enable it to carry out its expenditure responsibilities to accelerate grass root development in the economy. The government should focus on optimal revenue allocation targeted at economic growth to improve the standard of living of the citizenry. These would aid to achieve the goals of desired economic growth and sustainable national development in the years ahead.

Stock prices and long-run demand for money: evidence from Malaysia

This paper investigates the money demand function for Malaysia in the 1971-1996 period using the multivariate cointegration and error correction model methodology. The results suggest that a stable long-run relationship exist between real M2, the interest rate differential, income and stock prices. Stock prices have a significant negative substitute effect on long-run as well as short-run broad-money demand (M2) and its omission can lead to serious misspecification in the money demand function. The analysis from the vector error correction model (VECM) and the Toda & Yamamoto (1995) causality tests find that money is endogenous and that there is at least a unidirectional relationship between stock prices and real M2. Stock prices Granger cause real M2 indirectly through income between interest rates and stock prices and stock prices and money stock. This paper comes to the conclusion that due to the endogeneity of money, M2 cannot be completely controlled by Malaysia's central bank. Therefore, in formulating future monetary policy, the response of money demand to stock prices should be considered.