Vector Error Correction Framework Research Articles

Product differentiation in the fruit industry: Lessons from trademarked apples

AbstractWe derive price premiums for patented or trademarked apple varieties, also known as “club apples,” compared to open‐variety apples. We use an expansive retail scanner dataset, along with unique data on apple taste characteristics, to estimate monthly club apple premiums for 2008–2018. We find that club apple premiums are around 29% and have consistently decreased from 35% in 2008 to 22% in 2018. Positive club apple premiums relate to consumers' preferences for juicier, more acidic, and sweeter apples. We do not find evidence that consumers place value on the exclusivity of purchasing more expensive and limited varieties. Hence club premiums exist in the market by meeting the demand of consumer segments for apples with distinct taste attributes rather than replacing the demand of traditional consumers who prefer open varieties. We use a vector error correction framework to find short‐run and long‐run determinants of club apple premiums. In the short run, the sales of club varieties may positively associate with the sales of open varieties, given the premium and cost factors. However, in the long run, there is a negative cointegrated relationship between club apple sales, open apple sales, and club apple premiums; and an increase in club apple sales is adversely related to the open apple sales and club premiums. The high initial premiums of protected club varieties have provided incentives for the development of uniquely differentiated apple varieties, while in the long term as production expands, premiums decrease making club varieties less expensive for consumers [EconLit Citations: L66, Q11].

Price Discovery and Market Efficiency in India's Financial Futures Market within the Derivatives Landscape: An Empirical Analysis

This study offers a robust, long-term analysis of price discovery and the persisting lead-lag relationship between India’s equity futures and spot markets. Utilising monthly data from April 2005 to December 2022, it filters transient noise typically associated with high-frequency data. Information Share and Common Factor Weight methodologies within the Vector Error Correction (VEC) framework consistently reveal the dominance of futures markets in the price discovery process. The insights remain consistent across three distinct periods spanning the global financial crisis and the COVID-19 pandemic. The volatility dynamics and asymmetry effects in the Indian equity futures and spot markets using the Vector Error Correction - Exponential General Autoregressive Conditional Heteroskedastic (VEC-EGARCH) approach uncover notable asymmetry effects, signifying a strong market sensitivity to negative news. This highlights the necessity for comprehensive risk management strategies and stringent regulatory supervision, especially in light of the significant growth and systemic risks in the Indian derivatives market.

Assessing the Effect of International Lending Interest Rate Volatility on Government Infrastructural Expenditure

Spending on government infrastructure in Nigeria is faced with several economic challenges among which international lending rate volatility is significant. This study focuses on determining the effect of interest rate fluctuation on government infrastructural expenditure between 1993 and 2022. Its theoretical footing is the loanable fund theory, as it employs the Vector Error Correction framework to analyse the various data sourced from the World Development Indicators. The stationarity test confirmed that all the data were stationary at levels. Empirical results confirmed that international lending rate fluctuation has insignificant positive impact on public infrastructural spending (government infrastructural expenditure) in Nigeria. It was also observed that a long run relationship exists between international lending interest rate fluctuation and infrastructural development in Nigeria. It was therefore recommended that the regulatory authorities should strive to maximize this opportunity to design appropriate long term policies that can enhance infrastructural expansion through the appropriate modelling of international interest rate regime rather than putting in place short term measures that are not sustainable to infrastructural development. This paper proposes an innovative bond, the floating-interest infrastructure bond, which could attract private finance in infrastructure projects. This paper explains how private finance can be channelized into infrastructure investment by the sharing of spillover tax revenues between the government and the investors using a floating-interest-rate infrastructure bond. The private sector, such as banks and postal banks, will develop long-term deposits to provide loans for infrastructure development. Unlike the usual government bond, which provides a fixed interest rate, the proposed floating-interest-rate infrastructure bond pays a floating interest. Spillover effect depends on a number of factors, suc

Financial and economic uncertainties and their effects on the economy

We estimate new indices measuring financial and economic uncertainty in the euro area, Germany, France, the United Kingdom and Austria, following the approach of Jurado et al. (Am Econ Rev 105:1177–1216, 2015), which measures uncertainty by the degree of predictability. We perform an impulse response analysis in a vector error correction framework, where we focus on the impact of both local and global uncertainty shocks on industrial production, employment and the stock market. We find that global financial and economic uncertainties have significant negative effects on local industrial production, employment, and the stock market, while we find hardly any influence of local uncertainty on these variables. In addition we perform a forecasting analysis, where we assess the merits of uncertainty indicators for forecasting industrial production, employment and the stock market, using different performance measures. The results suggest that financial uncertainty significantly improves the forecasts of the stock market in terms of profit-based measures, while economic uncertainty gives, in general, more insight when forecasting macroeconomic variables.

Large Spillover Networks of Nonstationary Systems

This article proposes a vector error correction framework for constructing large consistent spillover networks of nonstationary systems grounded in the network theory of Diebold and Y ilmaz. We aim to provide a tailored methodology for the large nonstationary (macro)economic and financial system application settings avoiding technical and often hard to verify assumptions for general statistical high-dimensional approaches where the dimension can also increase with sample size. To achieve this, we propose an elementwise Lasso-type technique for consistent and numerically efficient model selection of VECM, and relate the resulting forecast error variance decomposition to the network topology representation. We also derive the corresponding asymptotic results for model selection and network estimation under standard assumptions. Moreover, we develop a refinement strategy for efficient estimation and show implications and modifications for general dependent innovations. In a comprehensive simulation study, we show convincing finite sample performance of our technique in all cases of moderate and low dimensions. In an application to a system of FX rates, the proposed method leads to novel insights on the connectedness and spillover effects in the FX market among the OECD countries.

Labour market effects of wage inequality and skill-biased technical change

ABSTRACT This paper analyses the effects of wage inequality on labour market development. Relevant theories are ambiguous, just as public debates. We measure the effects of inequality, skill-biased and skill-neutral technical change on hours, productivity and wages in a novel structural vector error correction framework identified by economically motivated long-run restrictions. The results show that structural inequality shocks have a negative impact on hours, productivity and wages. These effects are particularly pronounced at high inequality levels and for inequality below the median wage. Skill-biased technology shocks reduce – unlike skill-neutral ones – hours but increase inequality, productivity and wages.

A Vector Error Correction Model to Estimate Potato Supply Response in Colombia

The present study aims to investigate the relationship between potato output supply and potato and fertilizer prices in Colombia using 2003-2018 time series data. Johansen’s cointegration and the vector error correction framework were employed, and Granger and diagnostic tests were performed. The empirical results show a strong causal relationship between the variables and that the signs and the magnitude of coefficients are statistically significant. Potato and fertilizer prices are inelastic, and the speed adjustment coefficient of 70 % implies that it takes a short time for farmers to respond to price movements. It can be concluded that own-price and fertilizer prices are significant in determining output supply responsiveness in both the short and long run.

Governance and net-import dependency on food and agricultural products in Sub-Saharan Africa: does any causality exist?

Though most countries in Sub-Saharan Africa (SSA) are agricultural-based, the region is a net importer of food and agricultural products and experiences the highest level of food insecurity globally. The government have a joint goal of achieving a favourable balance of trade and food security; hence this study examines the causal relationship between quality of governance and net-import dependency on food and agricultural products for 25 SSA countries during the period 1995-2015. Principal component analysis is employed to develop a governance index based on the six worldwide governance indicators and a multivariate panel vector error correction framework applied to infer causality in the short and long run. The results reveal that a higher governance index is correlated with a lower net-import dependency ratio and the relationship is statistically significant. Evidence of unidirectional causality running from governance to net-import dependency is reported in 14 SSA countries, mainly in the long run. In conclusion, improving governance quality could support reduced food and agricultural net-import dependency through promoting agriculture production, exports and consequently reduced trade deficits in the long run. Hence, governance reforms in the region should be placed at the heart of the agricultural development agenda.

Estimation of peach supply response in Colombia using a Vector Error Correction Model

An empirical study of peach supply response to own-price and yield in Colombia using time series data from 2000 to 2018 was undertaken. A quantitative, correlational and non-experimental research design was selected and the Johansen´s co-integration as well as the vector error correction framework were employed. The Augmented Dickey-Fuller test showed that the time series were integrated of order one and the Johansen´s co-integration confirmed the existence of a long-term relationship between the variables. Moreover, the short and long run coefficients for own-price and yield were statistically significant and presented the expected signs, however, estimated own-price elasticity was below unit suggesting it is not an important factor in peach supply response. Furthermore, the vector error correction coefficient (-0.32) was negative and in line with theory, which showed that in the long-run, the model converges towards equilibrium, however at a relatively slow pace. Therefore, it can be concluded that, overall, the proposed model contributes to the understanding of the dynamics in peach output supply.

The Relationship Between Financial Development and Economic Growth in The United Kingdom: A Granger Causality Approach

This study aims to investigate the causal relationship between financial development and economic growth in the UK using quarterly data from 1963q1 to 2015q1. Three variables were used as proxies for financial sector development, namely, ratios of broad money supply to GDP, ratios of private sector credit to GDP and the ratios of stock market capitalization to GDP. Economic growth was measured using real GDP per capita. In order to achieve stated aim, the study employed the Johansen Cointegration test and the Granger causality test within a vector error correction framework (VEC) to test for the existence (or not) of a long run relationship as well as the direction of causality between financial development and economic growth. The result from the Cointegration test indicates that there is a stable long run equilibrium relationship between financial development and economic growth in the UK. The Granger causality test presents evidence of a bidirectional causality. This suggests that financial development and economic growth are mutually causal, that is, causality runs from both side which is in line with the feedback hypothesis in the literature which argue that financial development and economic growth exhibits a two-way causal relationship. In terms of each individual variable, the study finds that while bank credit to the private sector and stock market capitalisation Granger cause GDP per capita, GDP per capita on the other hand, Granger causes broad money supply.

To EMU or not to EMU: Can TFP “provoke” the capital structure puzzle of SMEs?

AbstractThis article investigates the influence of the macroeconomic environment on corporate leverage. Using panel data of European listed SMEs, we examine the relationship between capital structure and country‐level total factor productivity (TFP), GDP growth, interest rates and stock market development across firm categories (micro, small, and medium) and monetary regimes (EMU and non‐EMU countries) for the period 2005–2015. By performing a dynamic panel data analysis into a vector error correction framework, along with several model specifications and robustness tests, we provide new evidence that country‐level TFP is an important determinant of capital structure choice, while its impact depends on the institutional environment (inside the EMU or not). Although there are both short‐run and long‐run dynamic relationships between the corporate leverage and the macroeconomic factors, to EMU or not to EMU is also evident when looking at the three size categories. Overall, our results suggest that all SMEs are not the same, and the determinants of their capital structure vary across size categories.

The Empirics of Canadian Government Securities Yields

Keynes argued that the short-term interest rate is the main driver of the long-term interest rate. This paper empirically models the relationship between short-term interest rates and long-term government securities yields in Canada, after controlling for other important financial variables. The statistical analysis uses high-frequency daily data from 1990 to 2018. It applies both the cointegration technique and Granger causality within the vector error correction (VEC) framework. The empirical results suggest that the action of the monetary authority is an important determinant of Canadian government securities yields, which supports the Keynesian perspective. These findings have important implications for investors, financial analysts, and policymakers.

Dynamics among banking penetration, transport infrastructure, and regional growth: an empirical note from Indian states

This study examines the dynamics among banking penetration, transport infrastructure and regional growth for 23 Indian states within panel vector error correction framework over the period 2001 to 2017. Findings confirm the presence of long run equilibrium relationship between banking penetration, transport infrastructure and income for the panel. Panel FMOLS and DOLS results suggest that 1% increase in transport (roadways) infrastructure stocks and banking penetration increases the regional growth by 0.0620% to 0.06784% and 0.1836% to 0.1935%, respectively. Further, panel VECM-based causality results suggest that bidirectional causality between the regional growth and roadways infrastructure, banking penetration and regional growth, and banking penetration and roadways infrastructure respectively in long run. However, there is bidirectional causality between regional growth to roadways infrastructure, and banking outreach to roadways infrastructure, and unidirectional causality running from banking outreach to regional growth in the short run. Therefore, improving transport (roadways) infrastructure would be the right step towards regional growth in short run and long run as well.

Dynamics among Banking Penetration, Transport Infrastructure, and Regional Growth: An Empirical Note from Indian states

This study examines the dynamics among banking penetration, transport infrastructure and regional growth for 23 Indian states within panel vector error correction framework over the period 2001 to 2017. Findings confirm the presence of long run equilibrium relationship between banking penetration, transport infrastructure and income for the panel. Panel FMOLS and DOLS results suggest that 1% increase in transport (roadways) infrastructure stocks and banking penetration increases the regional growth by 0.0620% to 0.06784% and 0.1836% to 0.1935%, respectively. Further, panel VECM-based causality results suggest that bidirectional causality between the regional growth and roadways infrastructure, banking penetration and regional growth, and banking penetration and roadways infrastructure respectively in long run. However, there is bidirectional causality between regional growth to roadways infrastructure, and banking outreach to roadways infrastructure, and unidirectional causality running from banking outreach to regional growth in the short run. Therefore, improving transport (roadways) infrastructure would be the right step towards regional growth in short run and long run as well.

Vector error correction models to measure connectedness of Bitcoin exchange markets

AbstractBitcoins are traded on various exchange platforms and, therefore, prices may differ across trading venues. We aim to investigate return connectedness across eight of the major exchanges of Bitcoin, both from a static and a dynamic viewpoint. To this end, we employ an extension of the order‐invariant forecast error variance decomposition proposed by Diebold and Yilmaz (2012) to a generalized vector error correction framework. Our results suggest that there is strong connectedness among the exchanges, as expected, although some of them behave dissimilarly. We identify Bitfinex and Coinbase as leading exchanges during the considered period, while Kraken as a follower exchange. We also obtain that connectedness across exchanges is strongly dynamic, as it evolves over time.

Money, Output and Inflation in Bangladesh: A Test of Cointegration and Causality

This paper examines the relative impacts of money on economic growth and inflation in the economy of Bangladesh. It uses monthly data of Consumer Price Index, M2 multiplier, and industrial production index of Bangladesh from the Global Economic Monitor database of the World Bank. Using Johansen Co-integration and Vector Error Correction framework, the study finds that there is one cointegration relationship among these three variables. The Granger Causality results suggest that increased money multiplier has significant impacts on economic growth but non-significant impacts on inflation thus rejecting the neutrality of money in the Bangladesh economy over the study period. The results also suggest that the impact of money is unidirectional on economic growth. Keywords: neutrality of money, economic growth, cointegration, causality DOI : 10.7176/JESD/10-10-19 Publication date :May 31 st 2019

Economic progression of ASEAN - a comparative analysis of selected ASEAN economies

This study investigates the association of macroeconomic variables with economic growth of ASEAN-5 (Indonesia, Malaysia, Singapore, Thailand and Philippines) using annual time series data over the period of 1971 to 2017. We applied Johansen co-integration and vector error correction framework to investigate the impact of energy use, trade openness, financial and infrastructure development on growth. Our empirical evidence validates energy lead growth hypothesis in all five economies. Infrastructure development impacts economic growth positively in all countries excluding Malaysia in the long-run. The impact of financial development on economic growth of Singapore was relatively greater than the rest of the ASEAN-5 countries. The association of trade openness was positive with the economic growth of Malaysia, Singapore, Philippines, and Thailand in the long-run. The maximum speed of adjustment to long-run equilibrium was recorded for Thailand.

The macro determinants of firms' and households' investment: Evidence from Italy

Using under-exploited institutional sector account data, we assess the main drivers of both firms' and households' investment in Italy over the past two decades. We thus test the validity of the flexible neoclassical model of investment for both sectors, in particular by exploring the significance of additional drivers to output and to the real user cost of capital and by assessing both feedback effects and short- and long-run linkages across all variables in a vector error correction framework. Our findings support the neoclassical model in the long run. However, in the short run, both firms' and households' capital accumulation is found to have been dampened by a rise in uncertainty, a deterioration in confidence, as well as by higher indebtedness and by tighter financing constraints. Moreover, we find that disregarding the role of these short-run variables hinders the understanding of investment dynamics in Italy, especially in the most recent recessionary years.

Spain and the Classical Gold Standard: Short–And Long-Term Analyses

This paper seeks to link the two theories put forward to explain (the consequences of) Spain’s decision not to adopt the gold standard in the late nineteenth century, and does so by comparing the outcomes of short- and long-run approaches. The empirical results obtained from applying an autoregressive distributed lag (ARDL) and vector error correction (VEC) framework are reported. This ARDL and VEC analysis reveals that the expansionary monetary policies implemented had a positive impact on Spain’s economic growth. The exchange rate was a key factor, since it helped improve the terms of trade and promoted exports in the short run. None of these options would have been available under the gold standard system. This paper provides new empirical evidence for the core-periphery debate through an analysis of a peripheral economy, and sheds important new light on the developments in Spain at the time of the classical gold standard.

Oil price shocks and OECD equity markets: distinguishing between supply and demand effects

With the recent changes in international financial markets, investors and policy-makers are paying special attention to the relationship between oil price shocks and equity markets. This paper investigates how oil supply and oil demand shocks interact with OECD countries and macroeconomic variables within a cointegration vector error correction framework, which provides extreme flexibility with a parsimonious specification. By defining oil supply and oil demand shocks as endogenous variables, our proposed model allows us to gauge the shock transmission among the system variables through time and investigate the direct and indirect connections between oil price shocks and stock returns. We are also able to observe the long-run relationship between real stock prices and real oil prices measured by world and local prices. Our empirical findings show that the impact of oil price shocks substantially differs among the countries and that the significance of the results differs among the oil price specifications (real national oil price, world oil price, supply shocks and demand shocks).