Results Of Error Correction Model Research Articles

Causal relationship between macroeconomic variables and stock index in emerging economies: An empirical application for Turkey

In this study, causal relationships between Istanbul Stock Exchange (ISE) stock prices, dollar rate, consumer price index, interest rates and industrial production were investigated. In this context, in the period January 2005 to July 2011, monthly data were analyzed by using Johansen-Juselius Co-integration test, vector error correction model (VECM) and the impulse-response analysis. As a result of the research, there is no long-run relationship between ISE stock prices and macroeconomic variables such as interest rates, exchange rate and consumer price index. It has been proven that the existence of long-run relationship is only between ISE and industrial production. According to the results of the error correction model, a unidirectional causality from stock prices to industrial production has been proven. Impulse-response analysis results and error correction model results are in the same direction. Key words: Istanbul stock exchange, causal relationship, vector error correction model, impulse-response analysis.

Linkages among US Interest Rates and East Asian Purchases of US Treasury Securities

Recent increases in East Asian purchases of US treasury securities has led to growing concern over its impact on the US economy, particularly on the US long-term and short-term interest rates. The vector error-correction model results revealed the presence of long-run causal relations among the federal funds rate, the 10-year Treasury rate and the East Asian demand in addition to a unidirectional short-run causal relation from the 10-year rate to the Federal funds rate. The variance decomposition and impulse response findings indicated that the Asian demand for US assets has a limited but negative impact on the 10-year US Treasury interest rate. The transmission of the East Asian demand shock on both interest rates was almost immediate. The Federal funds rate is found to have a significant negative impact on the long-term rate.

The Impact of Exchange Rate Variability on Agricultural Exports of Developing Countries

This paper examines the impact of exchange rate and its volatility on the Turkish agricultural exports in the framework of error-correction model. The error correction model results indicate that except a few countries, the exchange rate and its variability do not have significant impact on Turkish exports of dried figs, grapes and tobacco. Thus, policies designed to increase the export level of Turkish agricultural products by incorporating weak Turkish lira against other currencies are not likely to be effective. The policy makers, therefore, should take into account the ineffectiveness of exchange rate on stimulating agricultural exports in their new policy designs.

Labor costs convergence in manufacturing between North America and Western Europe, 1960‐1991

Hourly labor costs in the manufacturing sector of seven EC countries, the USA and Canada are used to test the factor price convergence (FPC) by employing Johansen’s multivariate cointegration tests. We also examine if there is a two‐way causality in wages between two groups of countries covered in this study. Both objectives are evaluated by developing error‐correction models for Western Europe and North America. Our empirical findings provide support for the FPC and the existence of a long‐run equilibrium cointegration relationship among labor costs in manufacturing. The estimation results of error correction models show that a feedback causality exists between manufacturing labor costs in North America and Western Europe.

Time series dynamics of US State unemployment rates

This paper examines the time series properties of state and national unemployment rates. Based upon unit root, variance ratio, and cointegration tests, as well as Granger-causality and error-correction model results, several important conclusions can be made. First, forecasting models that include only levels of unemployment rates may produce spurious regression results. Second, in the vast majority of cases, there is no long run co-movement between the aggregate US unemployment rate and individual state unemployment rates. Third, models that are specified in first-differences generally yield reliable insights into state-national unemployment relationships.

Causality between Government Expenditure and Revenue in Malaysia: A Seasonal Cointegration Test

The objective of this article is to empirically incorporate the effect of seasonality in examining the causal relationship between quarterly government revenue and government expenditure in Malaysia for the period 1970.1-1994.4. The seasonal integration and cointegration tests developed by Hylleberg, Engle, Granger and Yoo (1990) and extended by Engle, Granger, Hylleberg and Lee (1993) are applied prior to determination of causality. Evidence of seasonal cointegration of biannual frequency is found. The seasonal error correction model results indicate a unidirectional causal influence from government expenditure to government revenue, supporting the spend-and-tax hypothesis in the short run, i.e. higher government spending leads to higher taxes. The implication of this result is that the size and growth of the public sector and consequential tax burden as well as fiscal deficit in Malaysia are largely determined by the spending decision. I. Introduction In the contemporary era, after World War II, the rapidly increasing size of the public sector in most economies inspired a number of theoretical and empirical studies in explaining the causes of such growth through quantitative analysis. Basically, this type of research was prompted by the need to devise appropriate measures in order to reduce the U.S. federal budget deficit (Manzini and Nejadan 1995). Besides, causality links between government expenditure and revenue have unique significance for developing countries in making budgetary decisions. Governments in developing countries often face greater budgetary constraints. Usually, the government has to make a choice between two possibilities: either to raise taxes or to reduce expenditure in order to contain the fiscal deficit through necessary adjustments in its fiscal operations. This linkage issue is crucial in understanding the causes and consequences of budgetary deficit, which is commonly observed in most countries. On a theoretical plane, there is no consensus among the economists on the issue of causal relations between government expenditure and tax revenue. Three alternative hypotheses have been advanced in perceiving the intertemporal budgetary links between taxation and government spending: (1) Spend-and-tax hypothesis (2) Taxand-spend hypothesis, and (3) Fiscal synchronization hypothesis. According to the spend-and-tax hypothesis, government starts spending first, and then determines how to finance the expenditure through additional taxes at a later date, so that causation runs from expenditure to revenue. Such a view is explored by Peacock and Wiseman (1967) who argue that external shocks (such as the Great Depression, World War II, oil shocks) which require temporary increases in government spending can lead to a permanent increase in taxes. The proposition that taxes adjust to changes in government expenditure is also substantiated in a study by Barro (1974), a supporter of the Ricardian Equivalence proposition, who argues that increases in taxes are the results of higher levels of fiscal expenditure; hence:, causality runs from expenditure to revenue with no feedback. The tax-and-spend hypothesis, contrary to the previous hypothesis, posits the reverse relationship. It is argued that changes in taxes lead to changes in government spending. This hypothesis earned its popularity with the supply-side economists. Economists, such as Friedman (1982), argued that increases in taxes only result in increased expenditure, and not in deficit reduction. This view suggests a causal relationship from revenue to expenditure. The fiscal synchronization hypothesis, on the other hand, postulates that governments change expenditure and revenue simultaneously. According to this hypothesis, governments decide on the desired expenditure and taxes, by comparing the marginal benefits and costs of any balanced budget change. …

Velocity and interest rate variability in Italy: a further test of the Friedman hypothesis

This paper examines whether interest rate variability leads to a decrease in the velocity of money in Italy. The hypothesis is tested using the Johansen cointegration technique and error–correction modelling. The empirical findings lend support to the Friedman hypothesis and help reconcile the mixed results of others regarding the hypothesis in Italy. The error–correction model results are consistent with risk–averse households holding more money, and thus reducing velocity, when faced with the uncertainty associated with interest rate variability.