Vector Error Correction Approach Research Articles

The Impact of Fiscal Policy on Economic Growth in Lao PDR

There has been various studies research on the Impact of the Fiscal Policy on Economic Growth by testing the Wagner’s Law and Keynes theory. This study holds two objectives, the first objective is to review a performance of the implementation government expenditure, and second objective is to test on the government expenditure contributes to the economic growth in the Lao PDR. To reach these two objectives, this study applies two methodologies. The first methodology is descriptive approach to respond for the first objective, and second methodology is bound testing approach and vector error correction approach to respond for second. This study is applied for time series data in terms of annual data from 1981 to 2014 in all models. The source of the data is mostly the website of the Asia Development Bank (ADB) year 2016. The results of the first methodology shows that the performance of the government expenditure continued increase rapidly, especially in 1986, 1997 and policy changed in 2012-2013 in terms of current expenditure for salary and capital expenditure directly affected to real Gross Domestic Products growth. The results of the second methodology shows that the Keynes theory and Wagner’s Law are significant and satisfied for the Lao economy in the long run. It meant that government expenditure has directly contributed RGDP, and vice versa. However, in the short run are not significant and unsatisfied in any lag.

A Comparative Analysis between Intrinsic and Extrinsic Drivers of Inflation

In most economies, particularly in developing countries, addressing inflation remains a significant macroeconomic challenge. This study seeks to examine the factors, both internal and external, that contribute to inflationary trends in South Africa. To achieve this objective, the authors employ the Johansen cointegration test, vector error correction approach, impulse response function, and variance decomposition on quarterly time series data spanning from 1994 to 2022. The findings of the study provide compelling evidence suggesting that both internal and external factors play a statistically significant role in influencing inflation. However, external forces exert a greater impact on the inflationary pressures witnessed in South Africa when compared to internal factors. Notably, factors such as trade openness, exchange rates, and imported prices contribute significantly to the elevated inflation rate in South Africa. On the other hand, internal factors like sustainable government expenditure, interest rates, and net export prices prove effective in mitigating the inflation rate.

An Investigation in to the Spatial Groundnut Market Integration in Ethiopia: Application of Vector Error Correction Approach 

An Investigation in to the Spatial Groundnut Market Integration in Ethiopia: Application of Vector Error Correction Approach 

National debt management and business sustainability in Africa's largest economy: A focus on the private sector.

In many developing economies, high and increasing public debt profile constitutes an essential means of financial risk. An appropriate debt management is germane for survival of business and good international reputation though its effect on private sector credit mobilization had been seldomly investigated. This study seeks to know whether strategic debt management approach exacts a significant effect on the Nigerian private sector and Africa at large resulting to higher credit availability for sustainable enterprise establishment. The study used a time-series observation spanning from 1981-2021. The method of data analysis employed the unit root test for stationarity. Johansen cointegration and vector error correction approach. The result of the unit root test indicates the series were all stationary after first difference and thus were integrated of order1. The Johansen cointegration test support the existence of a cointegrating series between the private credit and its determinants. More empirical evidence from the study shows that proper debt management and increase revenue generation through net taxes on products accounted for 0.93 and 1.32% increase in private sector credit mobilization, while total external debt stock was responsible for a significant negative influence of 0.60% on private sector credit mobilization. The study recommends that the government should always be proactive in their strategic and innovative approach to debt management, revenue generation and sources of funds. This will help not only to avoid crowding out of the private sector but will enhance adequate credit mobilization for effective operations of the private sector.

Industrialization, globalization, ICT, and environmental degradation in Malaysia: A frequency domain analysis

This paper examines the causal relationship between industrialization, globalization, information communication technology (ICT) and environmental degradation in Malaysia during 1970–2019. It uses two indicators of environmental degradation (carbon emissions and ecological footprint), three dimensions of globalization (political, social, and economic) and three indicators of ICT (users of internet, mobile cellular, and fixed telephone subscriptions). It utilizes Granger causality technique in frequency domain which differentiates between permanent and temporary causality, Vector Error Correction approach as well as Variance Decompositions. The bound test shows that the variables have cointegration relationship. It reveals joint long-run and short-run causality from industrialization, globalization, and ICT to carbon emissions, albeit the causality to ecological footprint is tenuous. It indicates that industrialization, globalization, and ICT significantly predict carbon emissions at high frequency than at low frequency. A substantial percentage of the forecast error variance in environmental degradation are explained by industrialization, globalization, and ICT. The robustness of the empirical outcomes is confirmed by the alternative proxies of the variables. Our study implies that industrialization, globalization, and ICT are determinants of environmental degradation. Therefore, policies to mitigate environmental problem should prioritize these variables to attain green economy.

An Investigation into the Spatial Rice Market Integration in Bangladesh: Application of Vector Error Correction Approach

An Investigation into the Spatial Rice Market Integration in Bangladesh: Application of Vector Error Correction Approach

An Empirical Analysis of the Supply Response of Coconut by Vector Error Correction Approach: Cross Country Comparison

This study estimates the output supply response of coconut in major producing countries using the cointegration approach. Regional variations in the domestic coconut production in Sri Lanka, India (represented by the state of Kerala), and the Philippines were captured by applying a Vector Error Correction Model (VECM). National aggregate time series data for the period 1970-2019 were used in the analysis. The empirical results show that unique long-run equilibrium relationships exist among coconut production, the coconut price, and the climate variable in three individual markets and the panel estimation. The regional disparities are revealed by the short-run dynamics throughout the analysis. Altogether, the econometric estimates provide strong evidence that the coconut producers respond rationally to the changes in own price and other supply determinants. However, both short and long-run price elasticities of the coconut supply response are rather low amidst its significance, suggesting that any pricing policy requires a comparatively long lead time for it to become effective in accelerating production. Furthermore, the estimated panel VECM can be further developed and validated to be used as a tool to analyze the regional deviances for assisting the policymakers in making comprehensive strategies to ensure the industry’s long-term sustainability.

Market power and concentration-performance analysis of the banking sector: A comparative study of Singapore and Pakistan

The study investigates the competitiveness of banking firms and its impact on Performance by testing the market power to efficient structure hypothesis. A comparative study conducted for Singapore and Pakistan, Period from 2005 to 2020, estimated Herfindahl Hirschman Index (HHI) and Market share as a proxy for efficient structure. Results indicated Singapore is a highly concentrated market, indicating a monopolistic competitive environment. However, Pakistan banking indicates a perfectly competitive environment. Study further; confirm the co-integration and long run relationship between variables through the Johansen co-integration and vector error correction (VECM) approach. The results specify the long run significant relationship between market power and competitiveness with banks profitability.

EFFECT OF EXPORTS, IMPORTS OF OIL AND GAS PRODUCTS, INFLATION, ON ECONOMIC GROWTH

This study aims to analyze the effect of oil and gas exports, oil and gas imports, and inflation on Indonesia's economic growth. This study employs secondary data, which consists of information retrieved or compiled by researchers from preexisting sources. The method used to analyze the relationship between endogenous and exogenous variables is a dynamic model with Vector Error Correction Approach Model (VECM). The findings revealed that in the long term and short term show that the Export of Oil and Gas Products has a positive effect on Indonesia's Economic Growth. In the long term and in the short term, imports of oil and gas negatively affect Indonesia's economic growth. Likewise, in the long term and short term, inflation negatively affects Indonesia's economic growth.

Stock Market Capitalisation, Banks’ Lending and Deposit Interest Rate in Relation to Financial Liberalisation Theory in Nigeria (1985-2021)

The paper examines the impact of deposit rates on savings, lending rates on credits and market capitalization of Nigerian Exchange group limited from 1985 to 2021, using co-integration and vector error correction approach. The specific objectives were to estimate the short-and long-run association as well as the error correction mechanism of lending interest rate and deposit interest rate and stock market capitalization in Nigeria. The outcome of the exercise validated the hypothesis of financial liberalisation theory that deposit rates on savings, lending rates on credits on market capitalization of Nigerian Exchange group limited. Deposit interest rate and lending interest rate have significant explanatory power for stock market capitalization, which is consistent with our expectations in line with financial liberalization theory in Nigeria. The regulatory body should mandate banks to channel their mobilised savings to investors in form of loans at reasonable interest rate. Hence, the pointer should be to identify those constraints and bottlenecks that are making it difficult for banks to make loans available to investors. The issue of high interest rate with hidden transaction costs must be vigorously addressed by the monetary authorities; Monetary authorities should pursue policies that will encourage the saving culture of the people. This could be done by increasing the deposit rate which would lure people to deposit their money in banks thereby increasing the supply of loanable funds. This would lead to a fall in interest rate and eventually rise in investment in stock market development.

Testing the Validity of the Long Run Neutrality of Money in Nigeria

Abstract Research background: There is no consensus among scholars on the interaction effect between money supply, price, and wages despite various studies conducted to that effect. Purpose: This study investigates whether the neutrality of money assumption holds in the long run in Nigeria, using annual data from 1970 to 2018. Research methodology: The study utilized the Johansen cointegration test and the Vector Error Correction (VECM) approach for estimation. Results: The results from the Phillips curve model contradict the classical school of economics assumption that money is neutral in the long run. This implies that in the Nigerian economy, money is not neutral in the long run. The long run Fishers’ effect model shows that the coefficient of LOG (CPI) exhibits a negative sign and is statistically significant at a 5% significant level, thus contradicting the hypothesis which states that a one percent increase in consumer prices will lead to an increase in the rate of interest by one percent. The coefficient of nominal money supply indicates a negative sign and insignificant statistically on the interest rate. The Short-run estimated results showed that the coefficient of the error correction term ECM (–1) indicates a negative sign and is significant statistically in the Fishers’ effect model. The result shows the actual and equilibrium values are corrected with adjustment speeds equal to 31% yearly. Novelty: The study recommends that the Central Bank of Nigeria should ensure an effective implementation of monetary targeting measures in fine-tuning the economy and curbing inflationary pressures.

Dysfunctional Association Between Public Expenditure Growth and National Consumption Cost: A Vector Error Correction Approach

The management of public expenditure is crucial due to its effect on people’s standard of living. In line with this, this study investigated public expenditure growth and national consumption costs using a vector error correction approach. The objective is to determine the effect of capital and recurrent expenditure on the consumer price index. The dependent variable in this study is national consumption measured by the consumer price index, while the independent variable is public expenditure measured by capital and recurrent expenditures. An ex post facto research design was adopted, and data for the study spanning from 1981 to 2019 was sourced from the World Bank. Descriptive statistics, unit root tests, cointegration tests and vector error correction estimates were all conducted with the aid of EViews 9. Based on the results, we concluded that there is a positive but insignificant relationship between the consumer price index and capital and recurrent expenditures of the government in Nigeria. We recommend that Nigeria’s government should increase expenditure on projects that will improve the economy and the living standards of the people. Additionally, there is an urgent need for proper monitoring of allocations contained in the budget to ensure efficient and effective utilization of funds, as this will help to improve the standard of living of the people and improve the economy.

Factors Affecting Groundnut Exports in The Gambia: The Vector Error Correction Approach

Groundnut, a leguminous oil seed grown in the uplands serve as food and main export crop in The Gambia. Despite a long tradition of groundnut farming, practical knowledge, favorable climatic conditions, and suitable land, recent declines in production and exports have hampered groundnut farming's contribution to poverty reduction, food security, and income generation. Revitalization of cash crop, such as groundnut has emerged as a national priority, embraced on a daily basis by rural development actors, particularly famers seeking to improve and secure their income. Thus, groundnut appears to be obvious and necessary, not only for farmers' income security, but also for the country's ability to attract foreign currency, provide livestock feed, and develop national trade. Given the country’s poor performance in groundnut exports, we deem it necessary to identify the key factors influencing that performance and study their effects on groundnut export earnings in order to draft appropriate policies aimed at increasing exports earnings in The Gambia. This paper employs the cointegration approach, with export value serving as the independent variable, to examine the country’s export performance over a 49-year period using time series data (1970-2018). Once a cointegration vector between the variables is discovered, the Vector Error Correction Model is applied. The findings reveal that nominal exchange rate, producer price are key factors affecting significantly the country’s export performance in short-run. Furthermore, in the long-run exchange rate, production, producer price, and world export price are significant factors determining groundnut export earnings in The Gambia. To increase the country’s market share and export earnings, especially in the long-run, it is recommended to ensure an effective transmission of international prices increments to farmers and to improve the production by raising yields significantly. Keywords: Determinants of Agricultural Exports, Agricultural Exports, Cointegration, Groundnut, The Gambia DOI: 10.7176/DCS/11-8-04 Publication date: October 31 st 2021

External Debt Burdens and Economic Growth: A Vector Error Correction Approach from Nigeria

This study examined the effect of external debt burden on the growth of Nigeria economy. Time series data was sourced from Central Bank of Nigeria Statistical Bulletin from 1986-2019. Nigeria real gross domestic was proxied for dependent variable while debt servicing; external debt stock, debt overhang, debt sustainability and crowd-out effect of external debt were proxies for independent variables. The study employed multiple regression models to estimate the relationship that exists between external debt burden indicators and Nigeria economic growth. Ordinary Least Square (OLS), Augmented Dickey Fuller Test, Johansen Co-integration test, normalized co-integrating equations, parsimonious vector error correction model and pairwise causality tests were used to conduct the investigations and analysis. The study findings revealed that 72 percent of the variations in Nigeria gross domestic products can be explained by the changes in external debt burden indicators. The results indicated a negative coefficient with external debt stock and debt overhang while a positive coefficient with debt sustainability, debt servicing and crowd out effect of external debt on Nigeria gross domestic products. From the findings, the study concludes that external debt burdens significantly affect growth of Nigeria economy. We recommend that the fund borrowed should be effectively managed, the federal government should laydown guidelines in terms of defining the purpose, duration, moratorium requirements and commitments, negotiation among others including conditions for external debt loans. Government should initiate and develop policies that will address the fundamental causes of external debt.

Implication of Human Capital Development on Economic Growth by Using Cointegration and Error Correction Modelling in Pakistan

The study examined human capital development and Pakistan economic growth in the quest to evaluate various policy grounds upon which capital development exist among nations and its nexus and effect it will have on the domestic economy, this paper cross-examined the objective purpose of capital development as a measure of economy development the vector error correction approach was adopted as an estimation technique to reveal the short and long term disequilibrium in the study. Findings from the study show that there is a direct influence between the subject matter of human capital and economic growth in Pakistan by these findings, the study recommends that the government of Pakistan should continue the level of spending for the two sectors of health and education which are the underlying sectors for attaining capital development and purposeful growth and development in the Pakistan economy.

Determinants of domestic saving in Ethiopia: A vector error correction approach

The intent of this paper is to determine determinants that affect domestic saving in Ethiopia using a 30 years' time series data. VECM were used to identify the major long run and short run determinants that affect domestic saving in Ethiopia. The estimated result of the study revealed that in long run, level of real per capital income and consumer price index are positive while government consumption ratio and inflation rate have negative influence on domestic saving. However, in the short run, consumer price index affect domestic saving negatively. Thus, minimizing government consumption expenditures are required to enhance domestic saving.

Has Knowledge Improved Economic Growth? Evidence from Nigeria and South Africa

This study examines whether knowledge causes economic growth in Africa's two leading economies: Nigeria and South Africa. Using the Vector Autoregressive and Vector Error Correction approach, the findings show cointegration among the variables. The speed of convergence of the variables to their long-term mean values is relatively higher for South Africa than for Nigeria. In the short run, it is observed that knowledge unidirectionally Granger causes growth for Nigeria, whereas bidirectional causality is observed for South Africa. The higher correlation between knowledge and growth in South Africa reflects the success of greater investment in education. Nigeria must increase investment in education and modern infrastructure to converge to South Africa’s growth trajectory. Moreover, for Nigeria, (i) knowledge unidirectionally Granger cause growth, (ii) evidence of bidirectional causality flow is apparent between trade, the economic incentive and growth and (iii) health unidirectionally Granger cause knowledge. As for South Africa: (i) there is bidirectional causality between knowledge, trade openness and growth, whereas investment and economic incentive, unidirectionally Granger causes growth, (ii) investment, trade openness and health unidirectionally Granger cause knowledge and (iii) economic incentive unidirectionally Granger cause trade openness. In conclusion, this paper argues that a transformed education system can provide the knowledge base essential for promoting and sustaining economic growth.

Revisiting environmental degradation and economic growth nexus using autoregressive distributed lag approach

PurposeThe paper attempts to revisit the nexus between economic growth, carbon emissions, trade openness, financial effectiveness and FDI for a sample of seven developed and developing countries using curvilinear relationship as per environmental Kuznets curve (EKC) hypothesis over long term.Design/methodology/approachThe authors determine the unit root properties of variables (using Clemente–Montañés–Reyes unit root test with double mean shifts and AO model and augmented Dickey–Fuller test) for structural breaks at different levels. Autoregressive distributed lag (ARDL) and error correction model (ECM) methodology was used to estimate long- and short-run parameters among the selected variables in sample countries from 1965 to 2016. Vector error correction (VEC) and Granger causality approach was used to determine the direction of causality.FindingsThe authors confirmed long-run relationship among the variables and highlighted high economic growth and energy consumption as the main causes of environmental degradation. While in India financial development and FDI inflows depict a negative association with environmental sustainability, however, such relationship was positive in the United Kingdom (UK), which is often considered as a benchmark for policymakers. The authors’ findings were in agreement with existing research insights in reporting FDI and financial development as the major contributors towards (unsustainable) sustainable environment through emissions in case of (developing country like India) developed country like UK. For other sample countries (China, Brazil, Japan, South Africa, United States of America (USA)), the authors’ model failed to capture financial development and FDI as significant contributors of carbon emissions. However, unidirectional causality running from energy to carbon emission was observed leading to the policy adoption of incentivizing alternative energy-based resources to increase energy efficiency across the energy value chain.Research limitations/implicationsManufacturing with renewable energy, in collaboration with private and foreign players, under an institutional framework is desirable. Policy instruments including mandatory administrative controls, economic incentives and voluntary schemes that promote energy efficiency building blocks need to be established. A sound legal system for implementing technological innovation, financial subsidy incentives, interest-free loan programmes and development of financial sector supports creation and thriving of energy efficient units, often a perquisite for accelerated development.Originality/valueBy undertaking a comparative analysis, the authors address the research gap through revisiting EKC hypothesis with different set of trade policy and financial development framework. To the best of the authors’ knowledge, earlier studies were limited to one-country data analysis and did not consider the comparative data set of developed and developing countries with reference to financial development and FDI components.

JGBs’ chronically low nominal yields: a VEC approach

ABSTRACT Low short-term interest rates, induced by the Bank of Japan’s (BoJ) accommodative monetary policy, is mainly responsible for keeping long-term Japanese government bonds’ (JGBs) nominal yields exceptionally low for a protracted period. Elevated government debt and deficit ratios do not exert upward pressure on JGBs’ nominal yields. This paper provides an empirical investigation of chronically low nominal yields of JGBs from a Keynesian perspective. It deploys a Vector Error Correction (VEC) approach to model long-term government bond yields.

MEASURING CO-MOVEMENT OF REAL INTEREST RATE AND INFLATION RATE: USING VEC APPROACH

It is important to know the future movement of economic variables for the planning and development of a country, Vector Error Correction (VEC) Model has been applied to disclose hidden long run as well as short-run patterns of the selected variables. ADF unit root testing procedure was applied to satisfy the conditions of applying the VEC Model. Using Johansen cointegration test long-run cointegration has been justified. But the VEC model reveals that long run significant causal relationship between the variables whereas there is no short-run causal relationship. The parameter was estimated using the OLS estimation technique. The validity of the model was confirmed by applying different quantitative approaches such as normality test, autocorrelation test, Portmanteau test, Unit root test, and various graphical approaches which suggested model selection and estimation were correct. The result of this present study may help Govt. agencies as well as planners to take an idea.