Vector Error Correction Mechanism Research Articles

Public finance instruments and output growth in Nigeria

This study investigates the empirical relationship between the aggregated and disaggregated components of fiscal policy variables and output growth in Nigeria using the vector error correction mechanism for the period of 1981 to 2021. This formulation was an improvement over previous empirical studies of the impact of public finance instruments on output growth in Nigeria. Our findings suggest that fiscal policy instruments (total expenditure, capital expenditure, recurrent expenditure, total revenue, primary fiscal balance, domestic debt, external debt, oil tax revenue, and non-oil tax revenue) exert significant impacts on output growth and most of the empirical results obtained support the hypothesised relationships between public finance instruments and output growth in Nigeria. However, aggregate federal government expenditure exerts a significant negative impact on output growth, while on the disaggregated scale, capital expenditure exerts a significant positive influence on output growth whereas recurrent expenditure exerts a significant negative impact on output growth. Given these findings, we recommend that the government of Nigeria, through its fiscal authorities, should adopt growth-enhancing fiscal policies that would engender macroeconomic stability and will be potent in refocusing recurrent expenditure towards ensuring productivity growth.

Rentierism—Political Instability Nexus: The Danger of Oil-producing Region Crisis in Nigeria

The growing popularity of the rentier state theory has made the focus on the impact of oil rents on political stability central for revealing how natural resource (including oil) windfalls link to the weakness of institutional quality in any resource-rich economy. Considering the core characteristic of a rentier state (such as Nigeria)—a distributive political economy—the article examines how the stability of Nigerian political system can be affected by oil rents over the period 1996–2021. Through the adoption of autoregressive distributed lag (ARDL) bounds test to cointegration and vector error correction mechanism (VECM) for the test of long-run causality, the apparent effect of oil rents on Nigerian political development is reflected in the analyses and findings. Empirical evidence supports the oil impedes political stability assertion, as there is statistically valid negative association between oil rents and political stability in the short run and long run. It is demonstrated that oil wealth could offer greater incentives for civil conflicts, which have resulted in escalating political problems. In addition, the causality mechanism implies that the relationship found merely indicates association between oil rents and the level of political stability in the long term, and it is not causal. Thus, it is posited that through the adoption and implementation of sound policy measures, the escalation of conflicts would likely subside, especially in most oil-rich regions or states, whereas civil order could be promoted. It is, therefore, critical to enhancing fairness in the use and distribution of oil wealth, improving people’s welfare, particularly in the oil-producing communities and in general, ensuring that democratic principles in the management of resource windfalls are sustained. JEL: Q33, Q34, H56, H12

Small and medium scale enterprises and economic growth in Nigeria

Due to the inconclusive situation of empirical studies on Small and Medium Enterprises ( SMEs) and economic growth in Nigeria and the need to promote growth accompanied by poverty alleviation, this study examined SMEs financing and economic growth in Nigeria from 1999 to 2021. The hypotheses formulated and tested in the study included that there is no significant relationship between commercial bank loans, total credit to the private sector (which captures other means of financing SMEs) and lending rate. Annual data was collected from the Central Bank Statistical Bulletin. The augmented Dickey-Fuller unit root test revealed that the variables were stationary at the first difference, while the Johansen co-integration test indicated a long-run relationship among the variables. The Vector Error Correction Mechanism (VECM) indicated commercial bank loans have a weak negative effect on economic growth. Total credit to the private sector has a positive effect on economic growth, while lending rates have a significant negative effect on economic growth. It was concluded that SMEs financing has significant positive effects on economic growth in Nigeria. It was recommended that the government encourage more commercial bank loans to SMEs by guaranteeing such loans, more development bank branches should be established; and the lending rate should be lowered.

Relations among Bitcoin Futures, Bitcoin Spot, Investor Attention, and Sentiment

This research investigates the function of price discovery between the Bitcoin futures and the spot markets while also analyzing the impact of investor sentiment and attention on these markets. This study utilizes various statistical models to examine the short-term and long-term relations between these variables, including the bivariate Granger causality model, the ARDL and NARDL models, and the Johansen cointegration procedure with a vector error correction mechanism. The results suggest that there is no statistical evidence of price discovery between the Bitcoin spot price and futures, and the term structure of the Bitcoin futures neither enriches nor impairs this lead lag relation. However, the study finds robust evidence of a long-run cointegrating relation between the two markets and the presence of asymmetry in them. Moreover, this research indicates that investor sentiment exhibits a lead lag relation with both the Bitcoin futures and the spot markets, while investor attention only leads to the Bitcoin spot market, without showing any lead lag relation with the Bitcoin futures. These findings highlight the crucial role of investor behavior in affecting both Bitcoin futures and spot prices.

The role of governance in girl‐child education: Insights on the odds against Nigerian women in leadership

AbstractIt is widely recognized that prioritizing female education is the global best investment. This is because the promotion of girls' access to education is essential for increasing women's formal economic opportunities and their participation in public decision‐making in the long term. Thus, understanding the nexus between governance and women empowerment becomes central for developing new thinking and addressing prevailing challenges. The study, therefore, examines the impact of governance effectiveness on school enrolment, primary, female (% gross) in Nigeria between 1996 and 2020, using autoregressive distributed lag (ARDL) bounds testing approach to cointegration and vector error correction mechanism (VECM) for the assessment of long‐run causality. Results show that governance effectiveness has a significant and positive effect on female primary school enrolment in the long run and in the short run. In addition, findings indicate that there exists bidirectional causality between the effectiveness of governance and female primary school enrolment, suggesting that these indicators are interconnected as they could influence each other. While it is recognized that government policies seem to have failed to redress the norms, societal values, and behaviors that contribute to the perpetuation of inequalities in education enrolment, good governance could further stimulate capacity development, thereby enhancing girl‐child education.

The Causal Relationship between Financial Development, Financial Globalization and National Savings in Pakistan

Financial globalization has a role in transmitting information within financial markets and helps in financial development. Additionally, financial globalization facilitates risk diversification alleviates the negative consequences of economic recessions, enabling nations to engage in international borrowing and lending activities, thus stabilizing income, consumption, investment and savings levels. This research study analyzes the causal nexus between financial development, financial Globalization and national savings in Pakistan. Co-integration test indicates co-integration vector henceforth, there is relationship between variables in the long run. The causal relation is determined through vector error correction mechanism and it is found that there is long run bidirectional causality between financial development, financial globalization and national savings in Pakistan. This study recommends that monetary authorities in Pakistan to encourage financial inclusion as the ratio of account holders in financial sector is very low. This will encourage documented economy and savings will be channelized to productive sectors. Likewise, financial development up gradation with par with international standards will not only encourage domestic savings but also help in financial globalization.

An Analysis of the Effect of Naira Devaluation on Nigerian Balance Of Trade

This study investigates the effect of naira devaluation on Nigerian balance of trade using time series data from 1986 to 2021. The study examined the long run and short-run equilibrium relationship between devaluation and trade balance over the study period. The study used unrestricted Vector Auto Regression (VAR), Co-integration and Vector Error Correction Mechanism (VECM) technique in the analysis of data. The variables currency devaluation (CDV), Export rate (EXPT), Import rate (IMPT) and Trade balance are found to be 1(1) variables, while Interest rate (INTR) is found to be 1(0) variables. Based on the VAR Co- integration test result, it indicates long-run equilibrium relationship among the variables. The error correction term was correctly signed and statistically significant. The estimates from the VAR model showed both positive and negative shocks running from naira devaluation to trade balance, export rate, import rate and currency devaluation based on the past and current values. The study concluded that, naira devaluation have positive and significant impact on trade balance of Nigeria. The study recommended that, Government should improve this indigenous innovation to meet up with international standard as a means to reduce dependence on import and encourage production of competitive goods and services, as export becomes cheaper after devaluation, it is expected that Nigeria as a country will immensely improve on its exported goods and increase the output of exportable goods which will leads to favorable balance of trade among others.

Foreign Exchange Rates Dynamics and Stock Market Performance in an Emerging Economy: Evidence from Nigeria

This study focused on the connection between foreign exchange rates dynamics and stock market performance in Nigeria (1995 to 2021). The paper set out to examine the effects of foreign exchange rates movements on the stock market performance in Nigeria. The data for the study were obtained solely from the Central Bank of Nigeria statistical bulletin. The Naira-U.S Dollar, Naira-British Pounds, Naira-Euro, and Naira-Swiss Franc exchange rates were proxies for the foreign exchange rate dynamics, while stock market performance was represented by stock market capitalization. The vector error correction mechanism (VECM) and the Pairwise Granger Causality tests were employed to analyze the secondary data. Results revealed the existence of long run relationship between foreign exchange rate dynamics and stock market performances in Nigeria though with an insignificant impact. In addition, a uni-directional causality was observed running from market capitalization to naira US-dollar exchange rate among others. It was therefore concluded that foreign exchange rates dynamics have an insignificant impact on stock market performances in Nigeria. Thus, there is need to align Nigeria’s economic stabilization policies in order to effectively achieve currency stability (of the naira). Policies such as outright ban on importation of items that can be produced locally should be pursued vigorously. This will no doubt boost aggregate domestic demand for such products and also go a long way in enhancing the value of the naira and by extension stock market outlook in Nigeria.

Central Bank of Nigeria Regulatory Policies and Non- Performing Loans in the Nigerian Banking Industry

This paper examined the nexus between Central Bank of Nigeria (CBN) regulatory policies and banks’ non-performing loans in Nigeria between the periods 1990 to 2021. Regulatory policies were captured using monetary policy rate, liquidity ratio and loan-to-deposit ratio as shown in the Central Bank of Nigeria Statistical bulletin 2021 edition, while the non-performing loans data was generated from the World Bank publications. The secondary data were analyzed by the use of vector error correction mechanism (VECM) and the pairwise granger causality tests. Results from the data analysis showed that CBN regulatory policies although influences non-performing loans by way of long run relationship has an insignificant effect on non-performing loans in Nigerian banks. Notably, data analyses further revealed that only loan-to-deposit ratio granger causes non- performing loans. Hence, it was concluded that Central Bank of Nigeria regulatory policies have an insignificant impact on banks’ non-performing loans in Nigeria. Thus, it was suggested that in order to effectively manage and reduce the incidents of non-performing loans in Nigerian banks, the apex regulatory body (CBN) should work towards improving on the effectiveness of its regulatory policies especially when it comes to the use of monetary policy instruments in addressing the problems of non-performing loans in Nigerian banks. Stakeholders should from time to time carryout periodic reviews of monetary policy instruments with a view to strengthening monetary policy tools that rely on market forces to transmit their effects.

The Crowding Out of Government Investment Over Private Investment in Iraq: A Standard Study Using the Model (VECM) for the Period 2004-2021

The purpose of this research is to investigate the impact of crowding out government investment upon private investment in Iraq during the period 2004-2021. We hypothesize that the investments made by the government crowd out the investments made by the private sector. Econometric methods were used to clarify the crowding-out effect through unit root tests by using the Augmented Dickie-Fuller test (ADF), the Phillips-Peyron (PP) test for time series, and the co-integration test according to Johansen. Vector Error Correction Mechanism (VECM) and model integrity tests were also applied. The independent and dependent variables undergo a long-term equilibrium relationship. It also turns out that there is a long-standing equilibrium causal correlation that goes from the independent variables, government investment (LX1), GDP (LX2), interest rate (X3) to the dependent variable private investment (LY), because the error correction limit parameter adopts the negative mark. It is also significant according to the (t) test (p > 0.05), where there is an inverse significant relationship for government investment (LX1) on private investment (LY) in the long term. This means that there is crowding in-out by the investments made by the government, and an inverse significant relationship to the GDP (LX2) on private investment (LY) in the long term, and an inverse significant relationship to the interest rate (X3) on private investment (LY) in the long term. the model's effectiveness in performing and its resistance to common issues has been confirmed.

Corruption: Governance challenge towards reducing unemployment in Nigeria

The study examines the possibility of having a very low rate of unemployment in Nigeria, if there is a reduced rate of corruption in the long‐term. While using cointegration regressions and Vector Error Correction Mechanism (VECM) over the period 1996–2020, it is affirmed that corruption could increase unemployment rate in the long run. The two corruption indicators employed (control of corruption and corruption index) are found to have a substantial effect on unemployment rate. Further evidence confirms that corruption and unemployment are cyclically interdependent. Findings indeed stress that a high level of corruption is harmful to employment growth. On the other hand, in the absence of sufficient job opportunities, rent‐seeking government officials would be more interested in collecting bribes from job seekers, which results in sustained unlawful practices among the public officials. Thus, adopting effective corruption‐control measures is critical. It is therefore suggested that to effectively tackle corruption incidents, there should be incentives for citizens or public officials to report bribery and the process of reporting corruption incidents should be further simplified. Strengthening anti‐corruption agencies and developing a sound legal framework that promotes a culture of lawfulness and impeccable practices in the public sector are central.

Trade, Foreign Direct Investment and Economic Growth in Albania. Evidence from Time Series

Trade and Foreign Direct Investment has been treated as crucial factors underlying the relative growth rates experienced by the Albanian Economy, especially during the late years, thus, boosting economic growth in the country and improving the degree of integration of the Albanian economy into the World markets. The paper aims to provide an empirical assessment of the relationship between Trade, Foreign Direct Investment, and Economic Growth in Albania, by examining Trade and FDI nexus growth interactions using yearly time series data for a time span of 1993-2018. For this purpose, we employed cointegration analysis and Granger causality analysis. The co-integration tests, based on Vector Error Correction Mechanism (VECM), confirm the presence of a long-run relationship between the variables. VECM results support a negative relationship between trade and GDP in the long-run and a positive relationship between trade and FDI. Granger Causality tests support the causality evidence of one-directional reinforcement of GDP on trade in Albania and changes in GDP and trade are causing changes in FDI. The VAR analysis confirms that changes in GDP and FDI are encouraging changes in trade. The paper outlines policy implications with respect to promoting relevant institutional policies for the enhancement of trade and FDI activities in the country, which potentially could enhance economic growth in the country.

Linkages between different types of globalization and socio-economic variables: panel data analysis for 129 countries

Present study explores the linkages between three categories of globalization to socio-economic indicators, which include poverty, inequality, unemployment and Human Development Index (HDI) using the sample of 129 countries over the period 1990 to 2019. The results show presence of co-integration among socio-economic variables and three categories of globalization. The findings indicate that economic, political and social globalization is positively related to each other. It is worth mentioning that all the three types of globalization decreases poverty but the role of economic dimension is appeared to be insignificant. Some negative effect of globalization on inequality and unemployment is also reported by this study. The traditional link between inequality, poverty and unemployment in the presence of globalization show that these three variables are closely related to one another, deterioration in any one variable has adverse effect on other two variables. Furthermore, results of Vector Error Correction Mechanism (VECM) show that socio-economic variables not only cause each other but they also improve human welfare that is measured by HDI. Long run causality indicates that all variables cause each other as error correction term is significant.

Fiscal Decentralization and Social Service Delivery Policy Response in Nigeria

This study examines the impact of fiscal decentralization on social delivery policy response in Nigeria, utilizing panel data for fourteen states in Nigeria for the period covering from 2000 to 2019. Specifically, this study evaluates the impact of fiscal autonomy on social indicators such as infant mortality rate, maternal mortality rate and adult literacy rate. The panel vector error correction mechanism (PVECM) the granger causality test was employed as the estimation techniques. The result of the granger causality test to determine the direction of causality relationship among the variables in the estimated model showed that there was one way directional causality running from maternal mortality rate (MMR) to fiscal autonomy (FISA); adult literacy rate (ADLIT) to population (LPOP); population (LPOP) to maternal mortality rate (MMR), adult literacy rate (ADLIT) to maternal mortality rate (MMR), and education expenditure (LEDU) to fiscal autonomy (FISA). This means that maternal mortality granger caused fiscal autonomy in Nigeria. The result also implies that adult literacy rate granger caused growth in population, and growth in population granger caused maternal mortality rate in Nigeria. The error correction variable in the infant mortality rate equation has the coefficient of 0.069. This indicates that approximately 6.9 percent of the distortion in the system would be corrected each whenever the system moves away from equilibrium. This depicts a slower speed of adjustment mechanism from the disequilibrium in the short run to equilibrium in the long run. The estimated infant mortality rate equation has a very good fit on the data and very high explanation power, given the adjusted R-squared of 0.736. The adjusted R-squared of 0.736 showed that approximately 74 percent of variation in the dependent variable (infant mortality rate) was accounted for by variations in the independent variables. This result is not in agreement with the theoretical postulate. In real term, the result showed that an increase in education expenditure by one percent would lead to a decrease in adult literacy rate by 0.22 percent, other things being equal. This result showed that spending in education has not improved the literacy rate in Nigeria. This suggests that it is either the fact that spending in education by the government has been so small that it cannot bring about improvement in the literacy or that funds meant for educational projects are siphoned into private pause, thereby resulting to huge decline in terms of literacy rate. Lastly, growth in population has a declining effect on adult literacy rate in Nigeria. This inference is in accordance with a priori expectation showing that as population increase, pressure is being put on the existing educational facilities and overwhelm it, leading to the decline in adult literacy rate. In concrete term, an increase in population by one percent resulted to a decrease in adult literacy rate by 0.73 percent, other variables remaining the same. Based on our result, the study made some policy recommendation for the states to double their efforts in generating their internal revenue to become fiscally autonomous less reliance on the federal government for allocation. Also, there is need for the government to raise her expenditure in education and health sectors so as to increase the literacy rate and health sector outcomes in the country.

EFFECT OF CREDIT ON AGRICULTURAL EXPORTS IN NIGERIA (1980-2018)

This study examined the effect of credit on agricultural exports in Nigeria. Time series data spanning the period between 1980 and 2018 were obtained from publications of Central Bank of Nigeria (CBN), National Bureau of Statistics (NBS) and Food and Agriculture Organisation database. Data were analysed using means, coefficient of variation, co-integration analysis and vector error correction mechanism (VECM). Descriptive results revealed a fluctuating trend in the volume of agricultural exports and credit to the agricultural sector with a mean of 351.99 tonnes and ₦80162.45 million respectively over the study period. There was a decreasing trend in the contribution of agricultural exports to GDP in Nigeria over the study period. Co-integration analysis affirmed a long run relationship among the variables. Results of VECM regression analysis revealed a positive relationship between credit to the agricultural sector, exchange rate and volume of agricultural exports in the short run. Exchange rate and inflation rate positively affects volume of agricultural exports, while ratio of export prices to producer prices and interest rate negatively affects volume of agricultural exports in the long run. The study concluded that credit to the agricultural sector, exchange rate, inflation rate, ratio of export prices to producer prices and interest rate are significant determinants of volume of agricultural exports. Hence, increased low interest rate commercial banks credit to the agricultural sector, effective and efficient monetary policies and bridging the gap between producer prices and world prices of agricultural export commodities will stimulate improved agricultural export earnings.

The Role of Foreign Direct Investment (FDI) Inflows on Export Performance in Developing Economies: Evidence from Bangladesh

Considering the importance of FDI inflows to enhance the export performance in the developing economies, this study aims to investigate the relationship between FDI inflows and export performance in Bangladesh using annual time series data for the period of 1995 to 2020. The empirical analysis is performed employing Johansen cointegration approach and Vector Error Correction Mechanism (VECM) in order to find out the long run as well as the short run relationship between FDI inflows and export receipts. The results of the study indicate that the export receipts have statistically significant positive relationship with FDI inflows in the long run. While other important variables, namely import payments, exchange rate and government development expenditure also have statistically significant influences on the export receipts, moreover the right direction of the all of these variables shows that to some extent there have been an insightful economic relationship between the variables. However, in the short run, such a relationship between FDI inflows and export performance is not statistically well justified, as the inappropriate sign of the coefficient of the error correction term indicates that the dynamic adjustment to the long run equilibrium has not been found in a consistent statistical manner. Lastly, this study also recommends that the government should initiate proper steps for the infrastructure development in the export oriented industrial sector to attract higher FDI inflows in accelerating the export performance that would ensure the faster economic development of the country as a whole.

Contagion Effects of Covid-19 on Select Stock Market Indices

We examine the impact of the COVID-19 pandemic on the interlinkages between the Indian stock market and some of the largest indices across the world. We compare the co-movements of these stock markets to identify the possibilities for international portfolio diversification. We use the Johansen cointegration technique and Vector Error Correction Mechanism to understand the nature of long-run and short-run cointegration. We also apply the Impulse Response Function to understand the time effects of the shock. The results of the Johansen cointegration test indicate that there is an increased level of cointegration among the stock market indices post the pandemic. Our results of VEC Block Exogeneity Wald Tests indicate that in the preCovid time, there were linkages between the stock markets of India and the U.K., Japan, and Hongkong. However, the post-pandemic results indicate the shock transmission effects from India to two very important European indices, i.e., the U.K. and Euronext stock exchanges, and to the stock market of Japan. We also observe transmission effects from the USA to India post-Covid period.

Nexus of Foreign Direct Investment, Domestic Investment, Trade on Economic Growth: A Cointegration Analysis

Objective: As Malaysia is an upper-middle-income country since 1992, it aspires to achieve high-income nation status by 2028. This paper aims to examine the interrelation of foreign direct investment inflows (FDI), domestic investment (GFCF), trade openness (TO), and economic growth (GDP) in Malaysia from 1979 to 2019. Methodology: The econometric model and techniques applied are unit root test, Johansen-Juselius co-integration analysis, and vector error correction mechanism. The unit root test result indicated the stationarity of all series at the first difference. Findings: Subsequently, co-integration analysis depicted a presence of one co-integration among the series at 5% level of significance, thus VECM is an appropriate technique to apply. In the long run, VECM findings indicated 1% increase in FDI caused a decline in GDP by 0.1338%, while 1% increase in GFCF will increase GDP by 0.8136%. Also, GDP has a weak unilateral effect on FDI in the short run based on VECM causality findings. Implications: This paper certainly provides new literature and evidence for the Malaysian context through advanced techniques applied.

Investigating renewable energy-climate change nexus by aggregate or sectoral renewable energy use?

Investigating the effect of renewable energy on the drivers of climate change correctly is significant as it is the basic source of climate change mitigation. In the extant literature, its effect on climate change has been estimated predominantly by regressing aggregate rather than sectoral renewable energy use either on aggregate greenhouse gas emissions or the components of greenhouse gases (GHGs) like carbon dioxide emissions. Against this backdrop, the paper investigates if we should estimate the nexus (i) by the causal effects running from aggregate or sectoral renewable energy use to GHG emissions and (ii) by the causal effects running from renewable energy consumption to aggregate GHG emissions or to its components like carbon dioxide (CO2) emissions. To this end, the paper introduces negative and positive (functional) complementarity between sectoral renewable energy consumptions in reducing or increasing GHG emissions, takes 20 OECD countries from 1990 to 2019, and uses augmented and non-augmented auto-regressive distributed lag approach and vector error correction mechanism. The study finds substantial differences among the results coming out of (i) regressing aggregate and sectoral renewable energy consumption on GHG emissions and (ii) regressing renewable energy consumption on aggregate GHG emissions and on CO2 emissions. The paper suggests regressing sectoral rather than aggregate renewable energy consumption on the components of aggregate GHG emissions like CO2 emissions rather than on aggregate GHG emissions to produce workable, specific, and conclusive policy alternatives.

Contributions of Electricity and Gas Sub-Sector to Economic Growth in Nigeria: A Linear Approach

Industrial policies were developed to stimulate and provide opportunities for prospering industrial activities following the decline of investment in the agricultural sector. This followed the discovery of crude oil in Nigeria. Electricity, gas, steam and air-conditioner, an industrial sub-sector is very crucial and requisite channel for industrial development, whether for automated, machines services or computer manufacturing processes. Failure in energy and power supply, as well as gas flaring remains a fundamental problem in Nigeria’s development. This study examined the impact of electricity and gas sub-sector of industrial sector on economic growth in Nigeria using data from 1980 to 2020. Vector error correction mechanism was used to determine the impact of the independent variables on the dependent variable. In the short run, our study shows the existence of positive, non-significant impact of electricity and gas output on economic growth. However, in the long run there was positive significant impact of electricity and gas output on economic growth in Nigeria within the period of study. The implication of the result is that adequate production and utilization of electricity and gas will spur economic activities that will generate economies of scale; since every component of the economy (industry, urbanization, modernized farming, etc) extensively demand for electricity and gas. Also, efficiency of electricity and gas would reduce energy bills for poor households, helps the nation to tackle greenhouse gas emissions. The continues gas flaring and consistent power cut in electricity in Nigeria affected industrial sector in Nigeria. This study showed that there is positive significant impact of electricity and gas on economic growth if there is intentional implementation of power policy with conscious disciplinary actions to control defaulters and make substantial investment that would stimulate industrial activities to spur economic growth.