Panel Vector Error Correction Model Research Articles

An Analysis of The Influence of Foreign Direct Investment on Emerging Market Economies Growth

This study examines FDI influence on economic growth in 24 emerging market economies. The generalized Method of Moment (GMM) method is used in this research using panel data to see the effect of FDI on economic growth. This study also uses the Panel Vector Error Correction Model (PVECM) method to see the short-term relationship and Fully Modified Ordinary Least Square (FMOLS) to see the long-term relationship. This study finds strong empirical evidence indicating that the influence of FDI on economic growth is statistically significant in the short and long term. These results vary if we include the level of development reached by countries in emerging market economies. In upper-middle and lower-middle-income countries, FDI positively and greatly influences economic growth. Different results occur in high-income countries, and the results are positive and insignificant. The results show that FDI in high-income countries tends to leave these countries.

Energy Transition in Non-Euro Countries from Central and Eastern Europe: Evidence from Panel Vector Error Correction Model

The countries of Central and Eastern Europe, from the non-euro area, have completed the process of economic transition before joining the European Union. Achieving a certain level of economic development and membership in the European Union have generated their involvement in a new transition process, namely the energy transition. Concerns about promoting the low carbon economy have become increasingly complex for those countries that are interested in the environmental impact of economic activity. This study aims to analyze the process of energy transition in the countries of Central and Eastern Europe on the basis of the causality relationship among specific variables for the period 1990–2018. The study is based on cross-sectional panel data and the panel vector error correction model (PVECM). The efforts made by these countries by joining the European Union have generated economic development, with positive effects being recorded on the protection of the environment, a fact due to the strict regulations adopted and rigorous implementation at the national level. Foreign capital had a positive impact on the transition to a low carbon economy because most of the FDI flows attracted by the non-euro countries in the CEE come from Western Europe, i.e., from EU member countries, located either among the founders or among the countries that joined during the first waves of union expansion. Membership in the European Union facilitates the energy transition process for the non-euro countries of Central and Eastern Europe, but the new geopolitical events generate the reconfiguration of the European strategy of considering the need to ensure energy security.

Analisis Kausalitas Indeks Pembangunan Manusia Pengangguran Pertumbuhan Ekonomi dan Ketimpangan Pendapatan di Indonesia

This study aims to analyze: (1) The causality relationship between unemployment and the human development index, (2) The causal relationship between economic growth and the human development index, (3) The causal relationship between income inequality and the human development index, (4) The causal relationship between economic growth and unemployment, (5) Causality relationship between income inequality and unemployment, (6) Causality relationship between income inequality and economic growth, (7) Long-term and short-term relationship between human development index, unemployment, economic growth and income inequality in Indonesia. The data used is panel data from 34 provinces in Indonesia during the 2011-2020 period. The analytical method used is Panel Vector Error Correction Model (PVECM) and Panel Granger Causality Test. The results of this study indicate that there is a relationship: (1) Two-way causality between unemployment and the human development index, (2) Economic growth to the human development index, (3) Income inequality to the human development index, (4) Economic growth to unemployment, ( 5) Income inequality to unemployment, (6) Income inequality to economic growth, (7) There is a long-term relationship between unemployment and the human development index which has a positive effect, economic growth has a negative effect on the human development index and income inequality on the human development index has a positive effect negative.

Causal nexus between air transportation and economic growth in BRICS countries

Air transportation is important factor which helps to vibrate economic activities in any economy. This paper explore causal nexus between air transportation and economic growth in BRICS countries by using balanced panel date for the period 1993–2019. Numbers of air passengers and air freight are used as measures of air transportation. Panel time series econometric techniques coupled with panel Vector Error Correction Model and Dumitrescu and Hurlin tests are applied for causal analysis. Unidirectional long run causalities are found from air passengers and airfreight to economic growth in these countries. Likewise, one way short run causal relation from air transportation to economic growth is found in these countries. Based on the findings of this, there is economic significance of air transportation in these countries, hence, important policy implications are discussed.

Leasing: A Critical Financing Option in the Nigerian Financial Arena

The study examined the effect of lease financing on the performance of quoted consumer goods companies in Nigeria for the period - 2009 to 2018. Specifically, the study assesses the effect of finance or capital lease, leveraged lease and the moderating effect of firm size on lease financing and performance of consumer goods companies. It also employed historical research design in investigating cause and effect relationship among the variables. Using Desk Survey Method, data were collated from Annual Reports and Accounts of the companies. The Ordinary Least Square (OLS) Multiple Regression Technique, as well as descriptive statistics, was employed in the analysis of data. Pre-tests such as Panel Unit Root test and Johansen/Fisher combined co-integration were adopted to check the presence of non-stationary and long-run relationship respectively. Vector Auto Regressive Lag and Panel Vector Error Correction Model were also employed to address the issue of short-run and long-run dynamics. Estimated results showed that finance lease had a significant positive effect on the performance of quoted consumer goods companies in Nigeria. Leveraged lease and firm size exerted a significant negative effect on the performance of quoted consumer goods companies in Nigeria. Based on the results, it was recommended amongst other things that the amount of debt used in the firm capital mix should be proportionate to the size of the firm in terms of its assets and capacity to produce consumer goods. Also, firms should reduce the use of finance or capital lease as a financing option given the overall negative effect of lease financing on the performance of consumer goods companies in Nigeria; and rather adopt the use of operating lease which has an overall significant positive effect, especially in the short run.

DOES FOREIGN DIRECT INVESTMENT REDUCE CARBON EMISSION? EVIDENCE FROM THE PANEL OF BRICS COUNTRIES

The nature of the impact of Foreign Direct Investment (FDI) on environmental pollution is unclear from the available literature and the present paper examines the short-run and long-run association of FDI with carbon emissions (CO2) in BRICS countries (Brazile, Russia, India, China and South Africa). The study estimates the panel data for the BRICS region from 1992 to 2018 with yearly frequency through panel cointegration test, panel vector error correction model and panel variance decomposition. The results, though have not found any long-run relation between FDI and CO2, they indicate that carbon emissions reduce in BRICS countries with increasing FDI in the short run and support the pollution halo hypothesis. This implies that the Multi-national Companies (MNCs) shift relatively cleaner industries and transfer greener technologies to BRICS. The results also indicate reverse causation running from CO2 to FDI in the short run. Furthermore, the Gross Domestic Product (GDP) of the BRICS region appears to be directly influenced by both FDI and CO2. Findings suggested that BRICS countries should furthermore liberalise FDI policies and parallelly tighten the environmental regulations alongside creating awareness and enhancing the capabilities of the country to absorb efficient and eco-friendly technologies. Policies should provide impetus to industries to shift energy-efficient technologies and less emitting equipment.

Trade Integration and Production Disintegration of Manufacturing Industries: India in Global Platform

The bulk of the world trade in commodities now a days consist of intermediate goods, which play an essential role in production and creation of value-added. As a consequence, the global production process is getting much more integrated today than ever before. To understand and examine this internationalisation in Indian manufacturing industries, using World Input–Output Database (WIOD), we have estimated the foreign and domestic value-added contents in export and output of Indian manufacturing for the period 2000 to 2014. Further, to complement this analysis, we have also performed regression estimations to identify the relationship between export, imported inputs use, and output growth of Indian manufacturing industries. Our study reveals low usage of domestic inputs use and more usage of imported inputs. These indicate stronger backward linkages in production and weak forward linkages in global consumption and production networks. Regression analysis also strengthens the finding of higher backward participation of the manufacturing sector. We have employed panel vector error correction model, fully modified ordinary least square and dynamic OLS models. Our results reveal a robust long-run causality between imported inputs usage and export-growth of the sector. JEL Codes: C33, C67, F14, F15

Kausalitas antara pertumbuhan ekonomi, pengeluaran pemerintah dan indeks pembagunan manusia Kabupaten/Kota di Provinsi Jambi

This study aims to: (1) To analyze the long-term and short-term relationship between economic growth, government spending and human development index in districts/cities in Jambi Province. (2) To analyze the causal relationship between economic growth, government spending and human development index in regencies/cities in Jambi Province. The data used is panel data from 11 districts/cities in Jambi Province during the period 2010-2020. Analysis of the data used is the Panel Vector Error Correction Model (PVECM) and the Granger panel causality test. The results of the study conclude that: (1) There is a positive long-term relationship between the human development index, government spending on education and health on economic growth. In the short term, there is a negative relationship between economic growth, spending on education and health on the human development index. Then there is a positive relationship between government education and health and economic growth. (2) Causality test Granger's results state that there is a two-way causality between economic growth and the human development index, then between government competition and HDI. Furthermore, there is a one-way causality (unidirectional causality) between the government contest and economic growth.

Co-movement between the convergence of economic and health status in Central and Eastern Europe

Abstract The Central and Eastern European countries have made considerable economic progress since the capitalist transformation. This paper investigates whether there is a co-movement between two factors of well-being, improvement of economic and health status between 1995 and 2018 compared to the six founding European Union (EU) member states. Applying the Pedroni- and Fisher-type cointegration test and a panel vector error correction model, our estimations suggest that there is a mutual causal relationship between economic convergence measured in GDP per capita and health status convergence measured by life expectancy. The long-term bi-directional effects are also proved by impulse response functions. Using the same econometric methods, the examination of the relationship between government health expenditure and life expectancy indicates that governmental health expenditure promotes the health status convergence. This study concludes that the FDI-based, low-wage growth model of the Central and Eastern European countries has not impeded the convergence in both factors of well-being to the founding EU member states. The results demonstrate that the improvement of the healthcare system may be a channel for the acceleration of convergence.

How Mobiles Affect International Trade, FDI and Economic Growth: Comparative Analysis of Income Level

ABSTRACT Mobile is a key sector promoting international trade, FDI and economic growth in the modern era. The objective of this paper is to examine the dynamic nexus between Mobile, trade, FDI and economic growth by employing a panel vector error correction model. Empirical results suggest that Mobile has more positively contributed to international trade in the low income country group than other groups, and it has a more positive impact on FDI inflow in the higher-income country group than other groups, it has a more powerful impact on economic growth in the middle-income country group than other groups.

Commercial and social activities of Indonesian Islamic banks: do they relate?

Purpose — This study investigates the relationship between commercial and social activities in Indonesian Islamic banks.Method — This study employed a Panel Vector Error Correction Model (PVAR) model with Impulse Response Function (I.R.F), Variance Decomposition (V.D.C), and Granger Causality. Observations were conducted from 2010 to 2020 on eight Islamic banks in Indonesia, representing 72.72 percent of the total Islamic banking population in Indonesia. The collecting of data pertains to the yearly financial report. Social activities are based on the amount of zakat fund distribution (ZKT) and benevolence fund distribution (DKB). Commercial activities are based on Islamic banking financial ratios that are proxied by Return on Assets (ROA), Financing to Deposit Ratio (FDR), and Non-Performing Financing (NPF).Result — The results showed that social activities in Indonesian Islamic banks are influenced by their commercial activities, but it does not apply vice versa. In other words, there is a one-way relationship between commercial and social activities in Indonesian Islamic banks.Contribution — This study contributes by studying the relationship between commercial and social activities by using the PVAR model with the analysis of Impulse Response Function (I.R.F), Variance Decomposition (V.D.C), and Granger Causality which so far have not been explored.

CAUSAL RELATIONSHIP BETWEEN RENEWABLE ENERGY CONSUMPTION, ECONOMIC WELFARE, AND FOREIGN DIRECT INVESTMENT IN 6 ASEAN COUNTRIES

This is an empirical study on the causal relationship between renewable energy consumption, economic welfare, and foreign direct investment in 6 ASEAN countries over period 2005-2019 using Panel-Vector Error Correction Model. Specifically, the unit root test, cointegration test, Granger causality test, and vector error correction model are imployed for the estimations. Empirical results do not confirm feedback causality between renewable energy consumption and gross domestic product per capita. The empirical results indicate that there is causality, short-term and long-term relationship between renewable energy consumption, gross domestic product per capita, and foreign direct investment. Furthermore, the result for long run causality from renewable energy consumption have negative effect to gross domestic product per capita. Additionally, short- run causality from renewable energy consumption and gross domestic product per capita have positive effect to foreign direct investment. On the other hand, short-run causality from foreign direct investment have negative effect to gross domestic product per capita.

Pro forma modeling of cryptocurrency returns, volatilities, linkages and portfolio characteristics

PurposeCritics say cryptocurrencies are hard to predict and lack both economic value and accounting standards, while supporters argue they are revolutionary financial technology and a new asset class. This study aims to help accounting and financial modelers compare cryptocurrencies with other asset classes (such as gold, stocks and bond markets) and develop cryptocurrency forecast models.Design/methodology/approachDaily data from 12/31/2013 to 08/01/2020 (including the COVID-19 pandemic period) for the top six cryptocurrencies that constitute 80% of the market are used. Cryptocurrency price, return and volatility are forecasted using five traditional econometric techniques: pooled ordinary least squares (OLS) regression, fixed-effect model (FEM), random-effect model (REM), panel vector error correction model (VECM) and generalized autoregressive conditional heteroskedasticity (GARCH). Fama and French's five-factor analysis, a frequently used method to study stock returns, is conducted on cryptocurrency returns in a panel-data setting. Finally, an efficient frontier is produced with and without cryptocurrencies to see how adding cryptocurrencies to a portfolio makes a difference.FindingsThe seven findings in this analysis are summarized as follows: (1) VECM produces the best out-of-sample price forecast of cryptocurrency prices; (2) cryptocurrencies are unlike cash for accounting purposes as they are very volatile: the standard deviations of daily returns are several times larger than those of the other financial assets; (3) cryptocurrencies are not a substitute for gold as a safe-haven asset; (4) the five most significant determinants of cryptocurrency daily returns are emerging markets stock index, S&P 500 stock index, return on gold, volatility of daily returns and the volatility index (VIX); (5) their return volatility is persistent and can be forecasted using the GARCH model; (6) in a portfolio setting, cryptocurrencies exhibit negative alpha, high beta, similar to small and growth stocks and (7) a cryptocurrency portfolio offers more portfolio choices for investors and resembles a levered portfolio.Practical implicationsOne of the tasks of the financial econometrics profession is building pro forma models that meet accounting standards and satisfy auditors. This paper undertook such activity by deploying traditional financial econometric methods and applying them to an emerging cryptocurrency asset class.Originality/valueThis paper attempts to contribute to the existing academic literature in three ways: Pro forma models for price forecasting: five established traditional econometric techniques (as opposed to novel methods) are deployed to forecast prices; Cryptocurrency as a group: instead of analyzing one currency at a time and running the risk of missing out on cross-sectional effects (as done by most other researchers), the top-six cryptocurrencies constitute 80% of the market, are analyzed together as a group using panel-data methods; Cryptocurrencies as financial assets in a portfolio: To understand the linkages between cryptocurrencies and traditional portfolio characteristics, an efficient frontier is produced with and without cryptocurrencies to see how adding cryptocurrencies to an investment portfolio makes a difference.

Dynamics of innovation activity and carbon emission: an empirical analysis from Korean manufacturing industries

ABSTRACT This study investigates the causal relationship between technology innovation and carbon emissions based on data from firms participating in the Korean Emission Trading Scheme (KETS). It is considered that the dynamics of firm innovation and environmental performance vary by industry group because each industry utilizes a different production process and carbon reduction ability. Therefore, in this study, the causal relationships between innovation and emissions are analyzed and compared by industry based on the panel vector error correction model (VECM) and the fully modified OLS procedures (FMOLS). The results show that innovation activities play an important role in promoting the environmental performance of firms at the 5% significance level in the long -run. On the other hand, a firm’s sales that represent production activities increase carbon emissions both in the long and short-run. Comparative analysis between industries confirms that the dynamics vary by industry. R&D investments have a significant effect on carbon emissions reduction in the energy industry in the short run, but in the high technology industries such as semiconductors and electronics, environmental regulation plays an important role in inducing technological progress in the short run.

Accounts Receivable and Payable Interrelationships: Evidence from Indian Small Cap Companies

Trade credit is vital for the survival of financial constrained SMEs, especially during the crisis. Companies act as both the proposers and recipients of trade credit. Credit proposed by companies for goods and services is represented by accounts receivable whereas credit is received by accounts payable. The present study focuses on determining the key component between accounts receivable and accounts payable. Further, it is estimating the causal relationship between trade credits offered and availed for the period 2011 to 2020 in Indian BSE small-cap manufacturing companies. The analysis is relevant in determining a company’s trade policy and working capital decisions. The analysis is carried out by panel unit root and co-integration test, followed by panel vector error-correction model and pairwise Granger causality test. Test results of the paper showed that in the short term, there is a one-way interaction from accounts receivable to accounts payable. This indicates that accounts receivable are deriving accounts payable, in terms of amount in the short run. In the long run, (a) in terms of amount, there is a one-way equilibrium connection between accounts receivable and payable & indicates that accounts payable is the dominant component and accounts receivable is the compromising component and (b) in terms of duration, there is two-way equilibrium relationship between accounts receivable days and accounts payable days so the researcher is unable to determine dominant component. The pairwise Granger causality result also confirmed the result of the VECM test.

THE RELATIONSHIP BETWEEN ECONOMIC GROWTH, ENERGY CONSUMPTION AND TRADE OPENNESS: THE CASE OF SHANGHAI COOPERATION ORGANISATION COUNTRIES

This paper aims to analyze the relationship between energy consumption, trade openness and economic growth for the countries of the Shanghai Cooperation Organization that have started to follow open foreign trade policies with the transition to market economy since the early 1990s. The study examines validity and aspect of the relationship between variables for the eight countries studied covering the period of 1990-2018 by using panel causality, panel cointegration and panel vector error correction model methods. According to the results of the study, there is a causal relationship among three variables mentioned. While there is a bidirectional causality between economic growth and trade openness and economic growth and energy consumption; there is unilateral causality between energy consumption and trade openness from trade openness to energy consumption. The results support long-term equilibrium among the variables, but the direction and validity of the relationship are different in the short term. Therefore, periodic differences need to be taken into consideration when determining the energy policies that will be implemented in the economic growth process by these countries’ policymakers.

An empirical assessment of electricity consumption and environmental degradation in the presence of economic complexities

To a large extent, the theories and concepts behind the effect of ecological footprint have been the paramount concern of the recent literature. Since the rising and falling of environmental degradation have been a continuous issue since the first phase of development, determinants such as economic complexity may play a critical role in achieving long-term sustainable development in the framework of environmental Kuznets curve (EKC) paradigm. Therefore, this research expands on the notion of an EKC paradigm for the world’s top ten most complex economies by considering four variables, such as real GDP per capita, electricity consumption, trade openness, and a new putative factor of environmental obstacle, the economic complexity index (ECI). This is one of the first studies to look at the impact of ECI on the ecological footprint of a specific sample from 1998 to 2017. The findings demonstrate a continuous inverted U-shaped link between real GDP per capita, the square of real GDP per capita, and ecological footprint. The EKC hypothesis is found to be valid in the long term in the examined complex economies. The findings of the panel autoregressive distributed lag (ARDL) of the pooled mean group (PMG) and fully modified ordinary least squares (FMOLS) estimations demonstrate that in the long term, electric power usage contributed to the carbon footprints. Furthermore, the economic complexity index and trade openness increase environmental performance over time. To determine if there is causation between the variables, we employ the panel vector error correction model (VECM) framework. Particularly, the results show unidirectional causality running from electric power consumption to ecological footprint and bidirectional causal relationship between (1) economic growth and ecological footprint; (2) square of economic growth and ecological footprint; (3) economic complexity index and ecological footprint; and (4) trade openness and ecological footprint.

The causal link between circular economy and economic growth in EU-25.

Actively promoting circular economy (CE) is one of the key means of global sustainable development. The purpose of this study is to analyze the causal relationship between CE and economic growth using data from EU-25 countries from 2010 to 2018. The selected CE indicators included municipal waste recycling rate, CE-related investment, municipal waste generation per capita, circularity rate, and trade in recyclable raw materials. Panel cointegration techniques affirmed the long-term equilibrium relationship between CE indicators and GDP. Panel vector error correction model results confirmed that in terms of short-run causality, an increase in material recycling led to a decrease in waste generation, an increase in waste generation led to an increase in CE-related investment, and economic growth led to circular economy growth, but not vice versa. This implies that encouraging CE-related innovation investments and promoting material recycling to stimulate the secondary raw material market can help achieve zero waste goals. Looking at the long-term causality, the GDP and CE indicators constituted a causal loop, which implies that there is co-evolution between them, although the circular economy is still in its infancy. This co-evolutionary sustainable economic growth can bring welfare to future generations.

Fiscal consumption and private consumption in Europe: what have we learned?

ABSTRACT In this paper we contribute to the long literature on how fiscal policy affects the real economy. In particular, we focus on how government consumption affects private consumption for a pool of European economies. We estimate panel vector error correction models between the two consumption variables for the EU 28 + Norway and Switzerland, for the two periods before and after 2008. The results show that government consumption affects private consumption differently in the periods before and after 2008. This means an increase in government consumption could have a positive impact on private consumption.

Economic instability and pollution emissions in developing countries: A panel data investigation

Developing economies are characterized by unstable and volatile growth performance. Some recent studies argue that this can potentially undermine their environmental quality. This study tests the impact of macroeconomic instability on pollution emissions for a large panel of developing countries. Thus, we extend the standard environmental Kuznets curve (EKC) framework and include the indicator of economic instability in addition to the other variables, including income, income squared, financial development, FDI, and trade openness. For this purpose, we use the annual dataset of 34 developing countries over the period 1985–2019. The empirical analysis comprises both short-run and long-run relationships among the selected variables, using panel cointegration and the Panel Vector Error Correction Model (P-VECM). The estimated results confirm our hypothesized pollution-enhancing effects of economic instability on the sample economies. Furthermore, we confirm the validity of the EKC hypothesis in the sample economies. These findings suggest that developing economies should ensure economic stability to control their CO2 emissions.