Vector Error Correction Approach Research Articles

Household Debts-and Macroeconomic factors Nexus in the United States: A Cointegration and Vector Error Correction Approach

This study applies cointegration and error correction approaches to determine the effect of macroeconomic determinants on household debt in the United States of America. Cointegration analysis provides an effective framework used for estimating and modelling relationships from time series data. Short-run and long-run cointegration models explaining the relationships between the US household debt and related macroeconomic factors are estimated. The data used covers a period of 1990 Q1 to 2013 Q1 and is sourced from the electronic data delivery system of the OECD, USA Federal Housing Finance Agency and the USA Department of the Treasury among others. SAS 9.3 version was used to obtain the results. The sample and variables were meritorious according to KMO and Cronbach’s alpha. Unit root test results provided enough evidence to conclude that the series were stationary after first differencing. Further data analysis was carried out with the first lag chosen by the AIC and SBC. Three cointegrating vectors were identified and were later standardised to correctly provide parameter estimates of the vector error correction model of household debts. The model revealed some short and long-run relationships. Revealed by the model is that 1.5 % of long-run equilibrium was corrected per quarter. The results of the current study are crucial to households and policy makers. Researchers may also refer to these results.

A Study of the Relation between Inflation and Exchange Rates in the Fiji Islands: A Cointegration and Vector Error Correction Approach

The main purpose of this study is to examine the effects of the exchange rates, international prices, and the demand shocks on inflation in Fiji. How the domestic inflation in a pegged exchange rate system is aligned with international price shocks is an important monetarist idea, and this is tested in this study. This study employs annual data from 1975 to 2010. The multivariate cointegration tests are done after the unit root tests, and further, the Vector Error Correction (VEC) model shows that the changes in Fiji’s CPI are Granger caused by the long-term trends in all other variables, and the CPI in Australia, and devaluation-year dummies are used as exogenous variables in the VEC model, and the changes in exchange rate and changes in demand shocks are the independent variables but made endogenous in the VEC model. The impulse response function also shows that due to the exchange rate depreciation, inflation has increased for many years in Fiji. The policy implication of our study is that as a monetary policy instrument, the flexibility of the exchange rate policy is indispensable for Fiji to appropriately absorb the international supply and price shocks.

A Multivariate Time Series Analysis of Household Debts during 2007-2009 Financial Crisis in South Africa: A Vector Error Correction Approach

In this study, we adopted multivariate time series approach to investigate the effect selected macroeconomic variables on household debts using South African data collected from 1990 Q1-2013 Q1. SAS 9.3 was used for the analysis. Johansen multivariate cointegration and the Toda-Yamamoto causality testing approaches were adopted. The ADF and KPSS unit root test results confirmed that all the variables under study were stationary. Cointegration results allowed the acceptance of four cointegrating vectors. The ECM revealed a negative sign implying the existence of a long-run equilibrium relationship among the variables. The coefficient of the error term implied that 13.8% of disequilibrium due to negative and positive shocks was previously corrected in one period per quarter. This adjustment provided the model with all the signs concurring with economic theory and literature on household debts. Toda-Yamamoto causality results revealed a unidirectional relationship running from GDP, UR and ER to HHD. A feedback relationship was discovered between the remaining variables confirming they are not weakly exogenous in South African household debts systems. This study recommends the formulation and implementation of policies that will effectively help in dealing with household indebtedness in SA and also to complement the NCR. More emphasis should be placed on threatening determinants such as household consumption expenditure, gross domestic product and house prices. DOI: 10.5901/mjss.2014.v5n7p107

Seasonal Quality Premiums for Wheat: A Case Study for Northern Germany

ABSTRACTSeasonal variations of the price premium for bread and feed wheat indicate opportunities to profitably adjust the grain marketing strategy of farmers that harvest (and store) both wheat types. In this article, we estimate the seasonal pattern of wheat price premiums on the German market using a vector error correction approach, which accounts for multivariate autoregressive conditional heteroscedasticity of the error terms. Our results indicate a significant downward trend for the premium during the marketing season, with the trend's magnitude depending on the average quality of harvested wheat. If farmers separately store both bread and feed wheat, they should tend to sell bread wheat before they sell feed wheat, particularly in years of low average wheat qualities. Further, the volatility of the price premium significantly decreases over the season, indicating higher risks at the beginning and lower risks towards the end. The volatility of the premium may present opportunities that require a reevaluation of the recommended temporal sequence of selling bread and feed wheat.

A gazdasági teljesítmény és a munkanélküliség területi egyenlőtlenségeinek kapcsolata

A fejlett piacgazdaságokban a makrogazdasági teljesítmény és a munkapiacok területi különbségei között fennálló egyensúlyi kapcsolatok az elmúlt évtizedekben több helyütt bizonyítást nyertek. Jelen tanulmányban azt vizsgálom, hogy tekintettel a fiatal piacgazdasági környezetre, Magyarországon az elmúlt időszak tapasztalatai alapján igazolható-e ez a kapcsolat. Ennek érdekében a gazdasági teljesítményt közelítő munkanélküliség és egyenlőtlenségi mutatóinak hosszú idősorait korrelációszámítás és a kointegrációs kapcsolatok kimutatására alkalmas vektor-hibakorrekciós modellek segítségével elemzem, melyek eredményei az idősor egészére nézve egyértelműen utalnak a feltételezett kapcsolatok hiányára. A gazdaságtörténeti megfontolásból kettébontott idősorokra megismételt tesztek szintén nem nyújtanak egyértelmű bizonyítékot a szóban forgó kapcsolat létezésére. Úgy tűnik tehát, hogy az elhúzódó gazdasági átalakulás folyamatai és az erőteljes állami beavatkozások nem adtak teret a jelenség kibontakozásának. A téma jövőbeni vizsgálata megalapozott, tekintettel a piacgazdasági időszakból származó idősorok rövidségére, valamint a 2008-as válság egyelőre ismeretlen utóhatásaira.

Impact of Foreign Direct Investment, Trade Openness, Domestic Demand, and Exchange Rate on the Export Performance of Bangladesh: A VEC Approach

This paper investigates the impact of foreign direct investment (FDI), trade openness, domestic demand, and exchange rate on the export performance of Bangladesh over the period of 1980–2009 using the vector error correction (VEC) model under the time series framework. The stationarity of the variables is checked both at the intercept and intercept plus trend regression forms under the ADF and PP stationarity tests. The Johansen-Juselius procedure is applied to test the cointegration relationship between variables followed by the VEC regression model. The empirical results trace a long-run equilibrium relationship in the variables. FDI is found to be an important factor in explaining the changes in exports both in the short run and long-run. However, the study does not trace any significant causal relationship for the cases of trade openness, domestic demand, and exchange rate. The study concludes that Bangladesh should formulate FDI-led polices to enhance its exports.

Supply response of mustard in Bangladesh: A cointegration analysis

An attempt has been made in this study to examine the supply response of mustard through cointegration and vector error correction approach. Augmented Dickey-Fuller (ADF) test indicates that all the variables considered have a unit root problem at level form and is stationary at differenced form for which all the data series are I(1). The trace statistic and maximum eign value tests confirm that there is at least one cointegrating vector. The short-run elasticity with respect to real mustard price is 0.1543 while in the long-run, the real mustard price elasticity is 0.5242. In the short-run impact of price fluctuation is very little or minimum. The mustard area is inelastic with respect to own price. Low short-run and long-run elasticities of supply indicate that mustard growers do not make considerable area adjustments in response to expected prices. Weather variable emerges as one of the important factors in determining the mustard area in the short-run. Due to low price elasticity, price policies will not be much effective in obtaining the desired level of mustard output. Key words: Supply elasticity, mustard, vector error correction.

Does the Composition of Public Expenditure Matter for Growth in Nigeria: A Vector Error Correction Approach

Does the Composition of Public Expenditure Matter for Growth in Nigeria: A Vector Error Correction Approach

Fiscal Policy, Investment and Long-Run Economic Growth: Evidence from Indonesia

This paper reviews the impact of fiscal policy on investment and economic growth in Indonesia. Investment accelerates physical capital accumulation. In turn, physical capital contributes to economic growth. Using vector error correction approach, we find significant relationships between fiscal policy variables and investment. Government revenue and current expenditure influence investment negatively. On the other hand, government development expenditure increases investment and economic growth. The implication is development expenditure may be utilized to enhance economic growth. Moreover, budget deficits might serve the objective of long-run economic growth as far as fiscal sustainability and resilience can be maintained.

Supply Response of Potato in Bangladesh: A Vector Error Correction Approach

An attempt has been made in this study to examine the supply response of potato in Bangladesh by using the vector error correction approach. The short-run price elasticity was 0.45 while the long run elasticity was 0.62. Price policies are effective in obtaining the desired level of output for potato. If intervention in the market is of necessity, then it must be implemented during the harvest season for altering price expectations. Also emphases should be given to increase potato export and establishing export oriented potato processing industries.

The determinants of regional real estate returns in the United Kingdom: a vector error correction approach

This study provides a detailed analysis to regional office real estate markets in the United Kingdom. A vector error correction (VEC) approach is applied to a unique panel dataset that covers the time period from 1981 until 2004 and allows a disaggregation to the NUTS 2 level. Long‐run equilibrium relationships and short‐term corrections among total returns and the key macroeconomic variables gross domestic product (GDP), total investment and unemployment are captured. Different samples are used to control for the special role of the London market and to alleviate potential bias due to differences in the number of properties within regions. The results leave little ground for assuming that the economic variables have no impact on total office returns. They rather provide evidence that there are relatively strong long‐run relationships. The assumption is supported that the long‐run relationships are causal and running from the economic variables to total return. Furthermore, there is evidence for short‐term causal relationships between economic variables, in particular total investment, and total return, as well as for total returns adjusting to the long‐term disparities resulting from changes in the variables. Consequently, the economic variables do not only seem to provide short‐term information but also short‐term immediate effects on the movements of total returns. The character of the long‐term equilibrium and short‐term corrections, however, is not identical across samples while London indeed seems special.

Regime switching in stock index and futures markets: a note on the NIKKEI evidence

AbstractUsing a time‐varying regime‐switching vector error correction approach, we find strong evidence that the NIKKEI stock index cash and futures prices are jointly characterized by regime switching, which is time‐varying and dependent upon the basis, the interest rate, the volatility of the cash index, and the US futures market. Copyright © 2009 John Wiley & Sons, Ltd.

THE IMPACT OF EUROPEAN AND GLOBAL INTEGRATION ON THE MARK-UP OF PRICES OVER COSTS

This paper develops a new approach for investigating the determinant of the mark-up of prices over costs. We estimate basic price equations around an expression for marginal cost that is derived from a cost minimisation problem, using a vector error correction approach to avoid endogeneity bias. Observed basic prices include the mark-up over marginal costs, and this mark-up is of interest to policymakers as an indicator of competition and ultimately as a determinant of the level of equilibrium employment. We look at the factors driving this mark-up, and in particular look at the role of EMU, as well as globalisation, the European Single Market and openness to trade and the introduction of the euro. We use a panel data set that includes both EMU and non-EMU members. The results indicate an important role for trade liberalisation in determining the mark-up, but openness itself and the introduction of the euro do not appear to have a significant role.

Efforts and Efficiency in Oil Exploration: A Vector Error-Correction Approach

High oil prices and gradual resource depletion have raised global concerns for security of energy supply. Successful exploration activity is a critical factor for future oil production. Based on standard neoclassical producer behavior and modern time series econometrics, this study reveals new insights into the process of oil and gas exploration. I find that reserve additions are enhanced by an increase in the oil price, due to responses both in effort and efficiency of exploration. Moreover, oil companies accept higher exploration risk in response to an oil price increase, implying lower success rates and higher expected discovery size.

Modeling regime transition in stock index futures markets and forecasting implications

AbstractUsing a time‐varying regime‐switching vector error correction approach, this paper seeks to address which factors explain the transition across regimes of the US and the UK stock index futures markets. The findings suggest that the basis exercises a significant effect in regime transition. The basis effect is driven by a dividend yield effect in the UK, and by a dividend yield effect and an interest rate effect in the USA. The volatility of the underlying index is another significant factor, which is consistent with the significance of the basis in conjunction with Chen et al. (1995). Furthermore, there is evidence of an international regime transition effect from the UK to the USA. In most cases, forecasts based on time‐varying regime transition models are more accurate than forecasts based on models with constant transition probabilities. Copyright © 2008 John Wiley & Sons, Ltd.

Effects of Introducing Five-Day Work Week in Korean Labor Market: A Semiparametric Vector Error Correction Approach

This paper uses the semiparametric error correction model (Li and Wooldridge, 2002) and investigates the dynamics of wage, employment and labor efficiency after introducing five-day work week to the Korean labor market. Efficient working hour function is obtained by nonparametric method (polynomial approximation) and the dynamics are investigated using impulse response analysis. Average derivative estimator is used to derive the impulse response function of the semiparametric error correction model. The results show that reducing working hours would not create new employment and thus it, as a labor policy, could not be a solution for unemployment. On the other hand, cutting working hours boosts labor efficiency so sharply that the efficient labor input increases. It is also shown that the Korean labor market is flexible enough to adjust the shock within a year.

Cross-listed stocks as an information vehicle of speculation: Evidence from European cross-listings in the early 1870s

This study deals with the price building process of cross-listed stocks on the most important European stock exchanges in the 1870s. By applying a vector error correction approach we look for cointegration relationships. Obviously, there was already a high degree of cross-border integration. Furthermore, we observe the uncommon phenomenon that it was not the home market Vienna but the foreign market Berlin which was the dominant one in the price-building process. An explanation could be the intense speculation during the 1870s in Berlin. Therefore, cross-listed stocks worked as a vehicle for spreading the ongoing speculation from Berlin to other places.

A structural time series approach to modelling multiple and resurgent meat scares in Italy

This paper exploits a structural time series approach to model the time pattern of multiple and resurgent food scares and their direct and cross-product impacts on consumer response. A structural time series Almost Ideal Demand System (STS-AIDS) is embedded in a vector error correction framework to allow for dynamic effects (VEC-STS-AIDS). Italian aggregate household data on meat demand is used to assess the time-varying impact of a resurgent BSE crisis (1996 and 2000) and the 1999 Dioxin crisis. The VEC-STS-AIDS model monitors the short-run impacts and performs satisfactorily in terms of residuals diagnostics, overcoming the major problems encountered by the customary vector error correction approach.

Measuring market integration in the presence of transaction costs–a threshold vector error correction approach

AbstractApplied econometric analyses of market integration based on price data alone have been criticised because they neglect the role of transaction costs. To meet this objection, threshold vector error correction models are used. Threshold models can account for the effects of transaction costs in price transmission without directly relying upon information about these costs, which are often unavailable. It is argued that threshold models that are based on two thresholds provide results that are economically more intuitive than those obtained from one‐threshold models. However, to this point no adequate econometric test is available for threshold significance in a two‐threshold model; such tests are only available for the one‐threshold model. In this paper a restricted two‐threshold model is developed in which the significance of the thresholds can be tested. This model is therefore amenable to economic interpretation and statistical inference. The model is used to estimate market integration in the European pig market.

Monetary Policy Transmission Mechanisms and Currency Unions: A Vector Error Correction Approach to a Trans-Tasman Currency Union

Transmission mechanisms are the channels through which monetary policy affects macroeconomic variables, such as GDP and inflation. Differences in transmission mechanisms can generate asymmetric behaviour among currency union partners when they experience shocks. This has the potential to widen existing cyclical variation between members of a currency union. We examine the similarity of transmission mechanisms in New Zealand and Australia and consider the implications this has for a currency union between the two economies. We examine these using the Vector Error Correction methodology. While conclusions using this methodology for New Zealand and Australia remain quite fragile, our analysis nevertheless suggests that the transmission mechanisms in New Zealand and Australia do display many similarities. In particular the adjustments of both GDP and the CPI in response to monetary policy shocks appear to be very similar. However there are some differences in terms of the size of the responses of some of the variables to identical monetary policy shocks. In a currency union with a different exchange rate pattern and with different monetary policy shocks, New Zealand may experience some new challenges.