Unrestricted Error Correction Model Research Articles

Effect of Interest Rate on Savings Mobilization in Nigeria

The study examines the extent at which interest rate affects savings mobilization in Nigeria. The study is hinged on the modified variant of McKinnon and Shaw hypothesis that accounts for the link between savings mobilization and interest rate. ARDL model was used in the study to test for co-integration for the long run and the unrestricted error correction model for the short run contemporaneous dynamics. Data gotten from CBN annual report and World Economic Outlook covers the period; 1986-2022 was used for the study. Accordingly, the study finds out that savings mobilization is significant but have negative responsive to changes in nominal interest rate both in the short run and long run. Also, the study further finds out that the effect of prime lending rate on savings mobilization is significant but has positive response in long run as against its significant negative effect in the short run. Thirdly, it was observed that maximum leading rate had significant positive effect on savings mobilization in the short run while inflation rate exerted significant negative effect on savings mobilization contrary to the latter significant positive response to changes in M2-GDP ratio in the short run. The study recommended the need for government to consider a reduction from the current double digit to single digit particularly in nominal interest rate and prime lending rate in order to stimulate savings through investment in Nigeria. Finally, monetary authorities may consider a moderation rise in price level thereby encouraging people to save.

Fiscal Sustainability and Its Implications for Economic Growth in Egypt: An Empirical Analysis

This study examines the association between fiscal sustainability indicators and Egypt’s economic growth from 1980 to 2018. Fiscal sustainability refers to a government’s ability to generate sufficient revenue to cover its costs and debt obligations in the long run without excessive borrowing or money creation. Egypt’s economic growth has slowed, raising questions about fiscal sustainability. This study aimed to analyze the dynamic relationship between fiscal sustainability indicators (government revenue, expenditure, external debt) and economic growth in Egypt. The autoregressive distributed lag (ARDL) bounds testing approach and unrestricted error correction model were applied to annual data from 1980 to 2018. A dynamic link was found between fiscal sustainability indicators and economic growth. Government expenditure and external debt significantly impacted economic expansion in the long term, while government revenue did not. Fiscal sustainability, measured by growth in total government expenses, external debt obligations, and revenue, significantly influences Egypt’s economic growth. Prudent fiscal management is crucial for sustained economic development. Policymakers should focus on controlling government spending, limiting external debt, and improving revenue generation to promote long-term economic growth in Egypt. Fiscal sustainability must balance critical investments in public services. Carefully managing fiscal deficits is key to unleashing Egypt’s economic potential. This study provides valuable insights into the connection between fiscal policy and economic growth in Egypt, informing policymakers’ decisions.

Does economic growth spark efficiency? Unveiling the Electricity Kuznets Curve (ELKC) in ASEAN-5 nations

We contribute to the conventional Environmental Kuznets Curve literature by modeling the relationship between income and electric power consumption among five Asian economies (ASEAN-5): Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Economic growth together with rapid urbanization contributes to increases in electricity use. Still, it is not clearly understood whether and to what extent improvements in technology could ultimately allow a more efficient use of power. We test whether electricity consumption follows an inverted U-shape curve (Electricity Kuznets Curve, ELKC) using the unrestricted error correction model fitted on historical data for each country. The long-run results indicate that the ELKC hypothesis is detected in Indonesia, the Philippines, and Singapore. Our results suggest that if these countries continue to follow the ELKC trajectory, further increases in income could facilitate energy-efficiency innovations to prevent a monotonic relationship between growth and electric power use. The finding implies that there is room for policies to incentivize energy efficiency measures in multiple sectors.

Empirical analysis of internet and mobile banking in Malaysia

Internet and mobile banking deliver banking services through various cashless payment tools, such as debit and credit cards, direct transfers and electronic wallets. The usage of internet and mobile banking in Malaysia has increased, but it is uncertain if they facilitate retail consumption. If internet and mobile banking are the preferred banking services, their usage could stimulate retail consumption; otherwise, their usage will be short-lived and more work must be done to develop the internet and mobile banking sector. This study aims to determine the influence of internet and mobile banking on retail consumption in Malaysia. The diffusion of innovation theory is applied by examining how technologically aids cashless payment systems and how internet and mobile banking might facilitate retail consumption. The short-run and long-run influences of internet banking and mobile banking are analyzed based on the autoregressive distributed lag (ARDL) unrestricted error correction model. The ARDL unrestricted error correction model was estimated for retail consumption, represented by the monthly retail trade index, and internet banking and mobile banking are represented by the number of monthly internet and mobile transactions. The results suggest a bi-directional causal relationship between retail consumption and internet banking in the short run. In the long run, the internet and mobile banking transactions were found to significantly facilitate household retail consumption, but not vice versa.

Nexus between Renewable Energy, Credit Gap Risk, Financial Development and R&D Expenditure: Panel ARDL Approach

In the study, we investigate the relationships between renewable energy consumption sub-indicators of G-8 countries and financial development, credit gap risk, and R&D expenditure from 1996 to 2018. The relationships among the variables in the study are analyzed by employing the Panel ARDL method and the Dumitrescu–Hurlin panel causality test. The cointegration relationships between the variables have been analyzed using the bounds test approach, and an unrestricted error correction model has been established. Contrary to previous studies in the renewable energy literature, this study employed the variable of credit gap risk. Therefore, we believe that this study will fill the gap in the literature and attract the attention of researchers and policymakers. The results indicate that increases in total demand for renewable energy positively affect the financial development of countries. Moreover, R&D expenditures increase as the demand for hydro energy and solar energy increases. This result indicates that wind power consumption has a short-term impact on R&D expenditure, and such an impact ceases to exist in the long run. According to the empirical research findings, the rise in demand for renewable energy may be a factor mitigating the credit gap risk of countries. In other words, the credit gap risk, which is considered a leading indicator of systemic banking crises, can be mitigated by the rise in the demand for renewable energy.

An empirical analysis of impact of banking sector on Indian stock market

PurposeThis study attempts to examine the relationship between the banking sector and stock market development in India.Design/methodology/approachTo analyze the relationship between banks and stock market development, the ratio of stock market capitalization to GDP is proxied by stock market development. The determinants of the stock market development are used for analysis namely domestic credit to the private sector as a ratio of GDP is used as a proxy for the development of banks, saving rate, per capita real GDP, and inflation. The autoregressive distributed lag (ARDL)-Bounds testing approach is used for the analysis. The paper also used the unrestricted error correction model and CUSUM and CUSUM square test to check the stability of the model.FindingsThe ARDL bounds test found that there is a long-run relationship between stock market development and bank-centered financial development. The results also revealed that the stock market is positively influenced by the development of banks, savings, and per capita real GDP in the short-run as well as long-run.Research limitations/implicationsThis paper suggests that improvement of banking sector plays an important role to increase liquidity of the capital market development in India. This paper also suggests that the economic growth and savings rate have positive impact to induce the capital market growth in both short run and long run.Originality/valueThe study has investigated the empirical relationship between the banking sector and the stock market development in a different methodological approach by using an ARDL model which is appropriate for a small sample size. There are few studies related to bank-centered financial development and stock market development in the context of India.

The Impact of Natural Gas, Oil, and Renewables Consumption on Carbon Dioxide Emissions: European Evidence

Natural gas has returned to prominence in the agenda of European countries since the beginning of the invasion of Ukraine by Russia in 2022. However, natural gas is a fossil source with severe environmental implications. This paper aims to verify the impact of natural gas on carbon dioxide (CO2) emissions for a European panel from 1993 to 2018 for sixteen countries. An Autoregressive Distributed Lag (ARDL) model in the form of an unrestricted error correction model was used to identify the short-run impacts, the long-run elasticities, and the speed of adjustment of the model. The results indicate that in the short-run, natural gas has a negligible impact on CO2 emissions when faced with oil consumption (6.7 times less), whereas the consumption of renewables and hydroelectric energy proved to be able to decrease the CO2 emissions both in the short- and long-run. The elasticity of oil consumption is lower than the unit, indicating that efficiency gains have been achieved during the process of the energy transition to clean energy sources. If economies use non-renewable energy, governments must continue to prefer natural gas to oil. Renewables and hydroelectric consumption must be used to revert the path of CO2 emissions. Given the unstable scenario that has been caused by the War in Eastern Europe, politicians should focus on accelerating the transition from fossil to renewable energies.

Investigating the Interactive Role of Demand Side Factors Potentially Responsible for Energy Crisis in Pakistan

This paper attempts to investigate the dynamic relationship among Energy Consumption (E), Financial System Development (F), Industrailization (I), Agriculture Development (A) and Economic Growth (Y) in case of Pakistan for the period 1971-2018 by using cointegration approach. After confirming the level of stationarity, the presence of long run relationship among the series was tested through newly developed combined cointegration approach in addition to ARDL bound testing with structural break dummy. The short run and long run parameter coefficients were estimated by unrestricted error correction model (UECM) because all the series are found stationary at 1st difference I(1) and sufficient evidence of cointegration. Finally, the direction of causality among the considered variables was achieved through Granger causality test within the framework of VECM. The long run parameter coefficient estimates by UECM indicate that financial development, industrialization, economic growth and decrease in agricultural contribution to GDP induce electricity consumption in Pakistan. We also found that a long-run unidirectional causality is running from the economic growth to electricity consumption which favors the electricity conservation hypothesis in case of Pakistan. The causality running from the electricity consumption to agriculture output coupled with negative parameter coefficient value suggests that electric power deficit is responsible for hampering the agricultural growth in Pakistan. The study suggests that electricity conservation policy in addition to prudent rationing of electric power among the various sectors may greatly contribute to minimize the adverse effects of energy crisis in Pakistan.

Impact of public debt profile on economic growth: Evidence from Nigeria

An excessive increase in public debt characterizes the contemporary development of the global economic and financial system. The paper aims to examine the short- and long-run impact of state debt on economic growth in Nigeria. The model was estimated using an autoregressive distributed lag (ARDL) bounds testing method to co-integration for the long-run investigation. At the same time, the contemporaneous dynamics were explored using an unrestricted error correction model. The data were collected from the Central Bank of Nigeria’s statistical bulletins and annual reports, and it spanned the years from 1990 to 2020. The study uncovers evidence of a long-term link between the study variables. In addition, the study finds that all the explanatory is statistically significant. Specifically, economic growth is significant and negatively responsive to changes in external debt by 0.19% and debt servicing by 0.07%, contrary to its positive response to changes in domestic debt and exchange rate by 0.27% and 0.18%, respectively. The paper, therefore, recommends that government may consider more domestic borrowings to foreign borrowings that should only be resorted to when it is indispensable. Moreover, the government should also strive to balance loan servicing and the economic sustainability.

What effect does public and private capital have on income inequality? The case of the Latin America and Caribbean region

The effects that the Latin America and Caribbean capital stock (public and private) had on the income inequality levels of 18 countries from this region were analysed, over a period ranging from 1995 to 2017, recurring to an autoregressive distributed lag model in the form of an unrestricted error correction model. The results from the three models that were estimated (with the total capital stock, the public capital stock, and the private capital stock) pointed for the existence of an enhancing effect from the capital stock (public and private) on the income inequality of these countries in the short-run, suggesting that the investments were made in the already richer/wealthiest areas. In the long-run, the effects of capital stock on income inequality seem to vanish, probably due to the efforts to correct the previous detrimental effect. However, the lack of a statistically significant impact shows that, although the efforts, capital stock (public and private) still does not contribute to the income inequality reduction, meaning that these countries should improve/change the management and the selection criteria of their physical capital investments to be able to reduce their income gap.

Impact of some Macroeconomic Variables on Tax Revenue in Nigeria

The knowledge of the relationship between tax revenue and the interplay of macroeconomic factors is necessary to maximize the gains of the proposed elimination of non-tariff barriers by the African Union. This study was carried out to investigate the impact of trade liberalization and six macroeconomic variables on tax revenue in Nigeria from 1981-2019, using the autoregressive distributed lag (ARDL) approach to cointegration and the Error Correction Model (ECM). The unrestricted error-correction model was specified in the study by modifying ARDL model. Total tax and domestic tax revenues were predicted by trade liberalization and most macroeconomic variables examined. A unit increase in trade liberalization triggered an increase of 3% in both total and domestic tax revenues when all other variables in the model were held constant. The results of ECM showed that short run and long run equilibrium were present in the system. The macroeconomic variables found to be predictors of both domestic and external tax revenues are share of petroleum and mining in GDP, foreign direct investment, share of agriculture in GDP, per capita income, exchange rate and inflation rate. These are therefore important to explain tax revenue in Nigeria. The key policy recommendation for improved and sustained tax revenue is to embark on comprehensive trade liberalization policies as well as regulate changes in macroeconomic variables.

Economic and political determinants of the South African labour share, 1971–2019

This study examines the drivers of the steady decline in South Africa’s private sector labour share between 1971 and 2019. The focus on South Africa is instructive as its distributional contestation is bounded in a matrix of racial conflict. Crucial reforms on trade, finance and welfare were undertaken since 1994, but the study finds little evidence that the extension of the franchise promoted egalitarianism, since white economic elites invested in de facto political power. This study employs an Unrestricted Error Correction Model to estimate the drivers of the private sector labour share, and the findings suggest that globalisation, financialisation and public spending have decreased the labour share, while the effects of education have been positive but insufficient to halt the decline.

A Dynamic Multivariate Causality Analysis of Energy–Growth Nexus Using ARDL Approach: A Malaysian Energy Policy Perspective

This study analyzes a dynamic long-run and short-run causal nexus between energy consumption and economic growth in the presence of capital, labor, and urbanization over the period 1971–2014, in Malaysia. The stationarity issue was tested using augmented Dickey–Fuller (ADF), Kwiatkowski–Phillips–Schmidt–Shin (KPSS), and Ng–Perron tests. However, a dynamic long-run co-integration relation between variables was checked through the ARDL technique. An unrestricted vector error correction model (MUVECM) was used to estimate the short-run and long-run dynamic relations between the parameters and the Engle–Granger method was used for causality analysis. Results of statistical analysis confirmed that all variables were found to be I (1) except variable labour was I(0) and none of the variables was I(2). Total energy consumption Granger caused GDP in one direction over the period 1992-2010 in the case of Croatia. However, labor and urbanization impacts were mixed. The Granger causality analysis confirmed mixed results in the short run and the long run. Moreover, estimated results confirmed a feedback hypothesis between income and capital was in the short term and the long run. The short-run and long-run causal effects of labor force on economic growth were confirmed. This study provides important insights to policymakers and energy economists. Prudent energy conservation policies and economically improved measures would be of great help. However, demand-side management-based policies would have no adverse effect on the economic performance of Malaysia.

The Effect of Macroeconomic Factors on Non-Performing Loans: A Time Series Analysis for Turkey

With the 2008 Global Crisis, Non-performing loans (NPLs) has dramatically increased in both developed and developing countries. The excessive and uncontrolled increase in NPLs caused serious deterioration in the banking system. Particularly, in the countries, such as Turkey, where the banking system has a quite significant place in financial system, the deterioration in the banking system affects not only financial markets but also the economy in a negative way. In this research paper, the association between exchange rate, interest rate, total loan volume and production (output), which are macroeconomic variables expressed as external factors in the literature, and NPLs is investigated for 2008:01-2017:12 period in Turkey. Unrestricted error correction model (UECM) and boundary test approach with the scope of ARDL analysis developed by Pesaran et al. (2001) is applied as an analysis method. Based on the analysis results, it is found that these macroeconomic variables and NPLs are cointegrated. Moreover, there is an economical and statistically significant relationship between interest rate and total loan volume and NPLs in both long and short term. In other words, it is determined that if interest rate and total loan volume increases, NPLs also move in the same direction.

Role of entrepreneurial activities for Nigeria’s economic recovery and growth (a case of studying Nigerian enterprises)

The paper presents the empirical analysis of the effect of entrepreneurship activity on the economic recovery and growth using SMEs in Nigeria. Two cities from each of the six geopolitical zones and four sectors of the economy were selected for the study. The total number of the selected four sectors form the population of the study while the sample size is seven hundred and twenty. The analysis employs the Ordinary Least Square techniques and time-series data for the economic recovery. The study adopts the Phillips-Perron test procedure to examine the stationarity of the study variables. The Johansen Cointegration test was employed to establish the cointegration of the variables and the unrestricted Error Correction Model was used to examine the speed of the alteration to the equilibrium. It has been inferred that the entrepreneurship activity and ERG are integrated of order (1(0)). This is established by the explanatory power of the models result of R value of 0.274 and R2 approximated to 0.075. The result shows a low positive impact of entrepreneurial activities on ERG. The study proves that, despite the crash in oil industry, the entrepreneurship has contributed positively to the Nigerian economy although at a low level. The study suggests that the government should support the development of entrepreneurship

The Causal Relationship between Energy Consumption, CO2 Emission, Population Growth and Economic Growth in South Africa: A Multivariate Investigation

The paper empirically examines the short and long-run causal relationship between energy consumption, CO2 emission, population growth and economic growth in South Africa. In so doing, the paper employs multivariate Granger-Causality within an ARDL-bounds testing approach to co-integration and unrestricted error correction model (UECM). The paper finds that energy usage and electricity consumption cause economic growth in South Africa but only in the short run. Additionally, the paper finds that, economic growth, population growth and energy consumption cause CO2 emission. Thus, policies should be targeted at the expansion of renewable and efficient electricity production in order to cope with the expected demand from expected population growth and from increasing demand from industries in order to maintain sustainable economic growth

An International Analysis of the Economic Cost for Countries Located in Crisis Zones

We study the impact on a country’s economy of sharing a direct land border with a country experiencing conflict. Through analysing sixty-three major episodes of regional instability during the period between 1990 and 2016 by using panel data methods applied to unrestricted error correction model, the opportunity cots of such regional conflict is examined. The resulting estimates of GDP loss are most profound for countries in Africa, Asia and the Middle East. Regional turmoil resulting from conflict has been found to have significantly reduced GDP growth in Angola, China, Kuwait, Mauritania, Saudi Arabia, Sudan and Tanzania, with estimates ranging from over 3% to 7% average reductions in GDP growth rate using both pooled OLS and fixed effects estimations (with an international average of 0.95% and 1.18% respectively). This considerable opportunity costs of military expenditure raise an important and challenging question to the concerned governments about the economic and social rightfulness of this expenditure and whether their people ultimately pay the price for the government decisions of increasing military spending.

Institutional Quality and Economic Performance in Nigeria: A New Evidence

The question of whether institutional quality is an important driver of growth has been the subject of a growing literature in both developed and developing economies across the globe. This study revisits this relationship in Nigeria from 1981Q1 to 2016Q4 and discusses the relevant policy implications for post Covid-19 Nigeria. The study adopted the ARDL approach which uses a bounds test approach based on unrestricted error correction model (UECM) to test for a long run relationship among the relevant variables. The findings indicate that institutional quality impacts negatively but insignificantly on growth in Nigeria, both at the aggregate and sectoral levels. However, initial output growth levels, capital and labour were found to be important drivers of growth in the country, while trade is growth-retarding. The study concludes that in this post Covid-19 era in Nigeria, there is need to improve the quality of socio-economic and political institutions in the country so that a more robust impact of these institutions can be felt in the economic performance of the country both at the aggregate and sectoral levels.

Economic growth assessment through an ARDL approach: The case of African OPEC countries

A new time series model is proposed, allowing to test the hypotheses of neutrality, conservation, growth, or feedback hypothesis for a group of African countries included in OPEC (Algeria, Nigeria, Libya, Equatorial Guinea, Gabon, and Angola). The Autoregressive Distributed Lags (ARDL) unrestricted Error Correction Model (ECM) approach for the period of 1973–2017 is applied for this purpose. This allows us to examine the short and long-run dynamic impact of energy consumption, oil prices, trade openness, and urbanization on economic growth. Long-run results point to a positive impact of urbanization over GDP in only two countries, being negative in the other two. Oil price impact is positive over GDP in three of them, whereas trade openness drives positively GDP in Equatorial Guinea and Angola, while negatively in Algeria. Heterogeneous bidirectional causality is found for countries and variables. As well, short-run results are also country dependent. The bidirectional causalities findings highlight that variables can predict each other in the future and policymakers should be aware of this, especially accounting for results and sample heterogeneity. Results seem to validate the neutrality hypothesis, considering energy consumption and GDP.

The influence of renewable energy use, human capital, and trade on environmental quality in South Africa: multiple structural breaks cointegration approach.

Recent economic and environmental literature suggests that the current state of energy use in South Africa amidst rapid growing population is unsustainable. Researchers in this area mostly focus on the effect of fossil energy use on carbon (CO2) emission, which represents only an aspect of environmental quality. In contrast, the current study evaluates the influence of renewable energy use, human capital, and trade on ecological footprint--a more comprehensive measure of environmental quality. To this end, the study employs multiple structural breaks cointegration tests (Maki cointegration tests), dynamic unrestricted error correction model through Autoregressive Distributed Lag (ARDL) model, and VECM Granger causality tests. The results of the Maki cointegration tests reveal the existence of a cointegration between the variables in all the models with evidence of multiple structural breaks. Further, the ARDL results divulge that an increase in renewable energy use, human capital, and trade improves environmental quality through a decrease in ecological footprint, while an increase in income stimulates ecological footprint. Moreover, causal relationship is found, running from all the variables to renewable energy and trade flow in the long run, while in the short run, economic growth causes ecological footprint. Trade is found to Granger-cause human capital, while human capital causes renewable energy. Additionally, human capital, renewable energy, and economic growth are predictors of trade. The study therefore recommends South African policymakers to consider the importance of renewable energy, human capital development, and trade as a policy option to reduce ecological footprint and improve environmental quality.