Vector Error Correction Model Approach Research Articles

Analyzing the Impact of Exchange Rates on Trade Performance in Tanzania: A VECM Approach

This paper investigates the relationship between exchange rates and trade performance in Tanzania using a Vector Error Correction Model (VECM) analysis. The background discusses the importance of exchange rates in international trade and how fluctuating exchange rates can impact trade performance. The methodology section explains the research design, model specification, and estimation techniques employed, such as unit root tests, co-integration analysis, and VECM. The findings highlight a long-run positive relationship between exchange rates, foreign direct investment, GDP, and labor forces with trade performance, while inflation rate shows a negative impact. Granger causality tests reveal causal relationships between different variables and trade performance. The conclusions suggest policy recommendations for the government to enhance trade performance through fiscal and monetary policies and encourage further research in the field.

Revisiting the Nexus between Renewable Energy Consumption and Economic Growth in Nigeria: The VECM Approach

The research investigates the effect of renewable energy consumption on economic growth as well as analyzing the dynamic relationship between both variables from 1990 to 2022. Annual secondary data covering the period between 1990 and 2022 were used in the study. Data on real gross domestic product, renewable energy consumption (% of total final energy consumption), gross capital formation (% of GDP), labor force, total and trade (% of GDP) were sourced from World Development Indicator. The study applies Johansen co-integration test and Vector Error Correction Model (VECM) to examine the effect of renewable energy consumption on economic growth and other explanatory variables as well as using pairwise granger causality test to examine the causal relationship between both variables. The empirical evidence revealed long-term relationship between renewable energy consumption and economic growth. Evidence shows that there is no causality either unidirectional or bi-directional between both variables. In short run, renewable energy consumption revealed a significant positive impact on economic growth. This shows that renewable energy may stimulate economic growth, particularly as it has a greater short-term impact on economic growth than capital formation. The key policy implication drawn from the results indicate the need for investment in renewable energy technologies and infrastructure, which can help to increase the availability and affordability of renewable energy, improve workforce development in Nigeria renewable energy sector.

The impacts of economic growth, foreign direct investment inflows, and energy usage on air pollution through globalization in China: A vector error correction model approach

During its economic globalization, China ranked first in the world regarding air pollution since 2005. China's massive carbon dioxide emission that causes global warming, directly or indirectly, can be stimulated by its economic globalization process, which needs to be observed. Hence, this article aims to observe the direct and indirect impacts among foreign direct investment (FDI) inward, energy usage, carbon dioxide emissions, economic globalization, the share of the industry sector in GDP, and economic growth from the exact starting point of globalization, in other words opening the gate of China (1979) to the intensive trade war between China and the USA, that began to change international policies (2013) of China. The vector error correction model (VECM) and the Granger causality tests are performed to obtain the causality directions and impacts among the variables. The empirical results reveal emerging FDI-led economic growth and the existence of cultivating air pollution owing to energy use, FDI inward (polluting-FDI), and economic globalization in China. Regarding the output of Granger causality tests, direct unidirectional causality from energy use to air pollution and indirect unidirectional causality from energy use to economic growth through inward FDI are observed. This study proposes crucial policies to encourage cleaner production and energy-saving technologies that reduce air pollution of China and stimulate China's economic growth during globalization.

Optimizing the role of rice central market in Java, Indonesia: the effect of toll roads construction to the rice market integration

Rice is considered as the primary staple food that Indonesian people mostly consume on daily basis. The need of rice in Indonesia is always increasing. However, the production of rice in Indonesia has not meet its demand. One of the factors resulting the number of paddy field decreasing is the construction of toll roads. The government of Indonesia has invested intensely in the development of a toll road network. The length of toll road operation has increased from around 750 km in 2014 to over 2,500 km in 2022. The construction encroaching paddy fields and resulting the production of rice decreasing every year. The paper objective is to investigate the implications of toll road investment to the rice market integration by focusing on Java as the central rice-producing region in Indonesia. We used the Vector Error Correction Model (VECM) approach to analyze the long-ranging daily rice price data series. The result of the study found that Cipinang Central Market in Jakarta has not the significant spatial market integration with rice markets in Java. Despite the fact that West Java, East Java, and Central Java with Cipinang Central Market have a major business tie, prices are not increasing. This shows a severe lack of market integration. The phrase “optimal market integration” refers to a more efficient market, especially when it comes to establishing rice market prices.

The economic burden of road traffic accidents and injuries: A small island perspective

The existing evidence on the economic burden of road accidents on GDP focused mainly on developed countries. This paper addresses an important gap in the literature by investigating into the impact of road traffic accidents and injuries on GDP in the small island of Mauritius. Mauritius, having perceived an important structural transformation over the past decades, is witnessing a rise in road accidents and injuries, which is a concern in terms of economic costs. In addition, it is a small island nation with limited road infrastructure, making it vulnerable to traffic congestion and accidents. The paper provides important insights for other island countries with similar geographic challenges. The Vector Error Correction Model (VECM) approach is used to assessing the existence of a long-run relationship between road traffic accidents and GDP in Mauritius from 1980 to 2020. In addition to road crashes, different levels of injury severity linked to road accidents are evaluated. The results reveal that on average a 1% rise in road accidents leads to a 0.42% fall in real GDP. Further, a 1% rise in casualties linked to road accidents is likely to cause a 0.18% decline in GDP. Although a long run relationship is established, there is no statistically significant impact of road accidents on GDP in the short-run.

Foreign Direct Investment, Non-Renewable Energy and Economic Growth: An Empirical Analysis from South Africa

Purpose This study aims to examine the connection between foreign direct investment, non-renewable energy, and economic growth in South Africa. Methodology The data was collected from the World Bank’s website from 1990 to 2020. The VECM and Granger causality approaches were employed to evaluate the connection between Economic growth, FDI, and Non-renewable energy. Findings The findings show that a long-term equilibrium relationship exists among the variables. Further, the result of the Vector Error Correction Model (VECM), shows a coefficient value of 0.0038 indicating the short-term adjustment speed of the system towards its long-run equilibrium. The result of Granger causality shows no bidirectional Granger causality among any of the variables. There is a Unidirectional Causality between GDPC and NRENW. Conclusion The study concluded that non-renewable energy can enhance economic growth in these countries, but it can aggravate the degradation of the environment. Essentially, foreign direct investment (FDI) significantly and negatively affects growth, suggesting that FDI entry into African nations negatively affects the environment.

The Impact of Macroeconomic Factors on Foreign Direct Investment in Indonesia from 2007 To 2022: A Vector Error Correction Model (VECM) Approach

This study will examine the impact of macroeconomic factors on FDI. The gap in this study lies in the significant changes in economic conditions and investment policies in Indonesia since 2007, which previous studies have not fully explained. The possibility of new factors affecting FDI flows requires more sophisticated analyses. In addition, the relevance of internalized investment theory in the current context of economic globalization has not been widely explored in FDI research in Indonesia. This study uses Secondary time series data and quantitative research techniques. Quarterly data from 2007 to 2022 is the data set used. The research employs the Vector Error Correction Model data analysis technique, with a significance level of 5%. The findings indicate that the exchange rate has an insignificantly negative short-term impact on FDI and a significant negative long-term impact. Then, inflation has a short-term positive and insignificant impact on FDI but a significant negative in the long term. Meanwhile, the interest rate has a significant positive effect on FDI in the long term, but in the short term, it has a negative and insignificant effect.

Analysis of Factors Affecting Foreign Exchange Reserves in Indonesia (2017-2021)

Foreign exchange reserves to maintain currency stability, finance international transactions, provide guarantees against global financial crises, strengthen national credibility, and provide financial flexibility. High foreign exchange reserves will have an impact on the implementation of economic policies to stabilize the domestic currency, diversify the economy, increase competitiveness, and good management of the balance of payments; the state can reduce the risk of a shortage of foreign exchange reserves and the negative impacts that may occur. This study aims to analyze the model of foreign exchange reserves in Indonesia. Variables that affect foreign exchange reserves are the exchange rate, exports, the BI rate, and the consumer price index. The VECM (Vector Error Correction Model) approach estimates the model. This study uses secondary time series data in the form of months from January 2017 to December 2021. The research findings are that the consumer price index has a significant positive effect in the short term, while the consumer price index at lag 3 has a significant negative impact. The exchange rate on lag one and lag 3 has no significant adverse effect, but on lag 2, it has a negative and significant impact. The export variable has a negative and significant effect on the three lags. Variable bit rate on lag one and lag 2 has no significant adverse effect, while lag 3 has a negative and significant impact. In the long term, the exchange rate and consumer price index variables substantially affect foreign exchange reserves. The BI rate variable has no significant effect on foreign exchange reserves, while exports significantly adversely impact foreign exchange reserves.

Dynamic Interaction of Coconut Oil and Crude Oil Prices: Insights from a Vector Error Correction Model

Understanding the relationship between commodity prices is paramount for investors, policymakers, and industries reliant on these markets. This study delves into the intricate dynamics between coconut oil and crude oil prices using a Vector Error Correction Model (VECM). The VECM approach allows for exploring these commodities' short-term adjustments and long-term equilibrium relationships. The analysis reveals that while there may not be a strong long-term interdependence between coconut oil and crude oil prices, robust short-term adjustment mechanisms exist. The cointegration rank two (2) highlights the presence of two cointegrating vectors, indicating a stable equilibrium relationship. The alpha and beta coefficients shed light on the speed and direction of adjustments, emphasizing how the system corrects deviations from the equilibrium relationship. Various model selection criteria, including the Akaike Information Criterion (AIC) and Bayesian Information Criterion (BIC), validate the VECM's efficacy in capturing the complexities of these markets while maintaining model simplicity. Moreover, significant error correction terms emphasize the system's self-correcting nature, ensuring long-term stability. Interpreting the coefficients of the lagged terms reveals short-term dynamics, showcasing how coconut oil and crude oil prices mutually influence and respond to changes in one another. The absence of significant autocorrelation in the model's residuals validates the model's accuracy in capturing underlying dynamics.

CO2, GDP and Openness: A Vector Error Correction Model Approach for the Eurozone

Since the 2015 Paris Agreement, it is obvious that sooner or later the countries will be compelled to align their carbon dioxide (CO2) emissions to the international standards. This paper investigates the transition risk measured by the CO2 emissions and its causal relationships with economic growth and openness thanks to an empirical approach. Given the data availability, the database is based on an annual frequency. It starts in 2008 to end in 2019. The sample takes into account 10 Eurozone countries. We run econometric dynamic specifications by using a vector error correction model (VECM). These models are very flexible and provide interesting information on the short term and the longterm dynamic relationships between the CO2 emissions, the Gross Domestic Product (GDP) and the openness. The impulse function gives interesting results on the variable’s impacts generated by the CO2 emissions and the variance decomposition sheds light on the magnitude of the forecast error variance determined by the shocks to each of the causal variables over time. The main results show negative relationships between the CO2 emissions and the openness and between GDP per capita and CO2 emissions. This conclusion may be useful to review the economic growth factors and the transition risk measured by the CO2 emissions.

Impacts of industrial production and air quality by remote sensing on nitrogen dioxide concentration and related effects: An econometric approach

The high concentration of nitrogen dioxide (NO2) is to blame for West Java's poor Air Quality Index (AQI). So, this study aims to determine the influence of industrial activity as reflected by the value of its imports and exports, wind speed, and ozone (O3) on the high concentration of tropospheric NO2. The method used is the econometric Vector Error Correction Model (VECM) approach to capture the existence of a short-term and long-term relationship between tropospheric NO2 and its predictor variables. The data used in this study is in the form of monthly time series data for the 2018–2022 period sourced from satellite images (Sentinel-5P and ECMWF Climate Reanalysis) and publications of the Central Bureau of Statistics (BPS-Statistics Indonesia). The results explained that, in the short-term, tropospheric NO2 and O3 influence each other as they would in a photochemical reaction. In the long-term, exports from the industrial sector and wind speed have a significant effect on the concentration of tropospheric NO2. The short-term effect occurs directly in the first month after the shock, while the long-term effect occurs in the second month after the shock. Wind gusts originating from industrial areas cause air conditions to be even more alarming because tropospheric NO2 pollutants spread throughout the region in West Java. Based on the coefficient correlation result, the high number of pneumonia cases is one of the impacts caused by air pollution.

Nexus between financial inclusion and Islamic financing distribution: Evidence from Indonesian MSMEs

Purpose – The purpose of this study is to investigate the relationship between financial inclusion and the distribution of Islamic banking financing to Indonesia's MSME industry.Methodology – This study utilizes the Vector Error Correction Model (VECM) approach covering the period between 2015 to 2020.Findings – The study's findings suggest that the use of all-inclusive financial variables, as represented by the number of ATMs, branch offices, and Third-Party Fund (TPF), has a significant effect on the distribution of financing in the short-term but not in the long term. Furthermore, macroeconomic as well as internal control variables, such as inflation and Non-Performing Financing, have been shown to have a significant influence. The impulse-response function analysis shows that the financing distribution responds positively to financial inclusion variables such as ATMs and branch offices. TPF, inflation, ROA, and exchange rate variables were found to have negative responses in the case of a shock.Implications – The findings of this study are expected to be used as a basis to develop government policies, particularly in supporting the post-COVID-19 national economic recovery through a comprehensive financial program that can broaden access to financing from Islamic banks for the general public, particularly MSME actors who have been severely impacted by the COVID-19 pandemic.Originality – This investigation utilizes three distinct indicators to assess the relationship between Islamic financing distribution in Islamic banking and financial inclusion for MSMEs. These include measures of financial inclusion, financial performance metrics of Islamic banking institutions, and macroeconomic variables.

Defense Budget and Response of Foreign Direct Investment (FDI) in Nigeria: Co-Integration and VECM Approach

The research was conducted on the topic: Defense Budget and Response of Foreign Direct Investment (FDI) in Nigeria: Co-integration and Vector Error Correction Model (VECM) Approach. It investigated how Foreign Direct Investment (FDI) move in response to defence budget considering the insecurity problem faced by Nigeria during the period of the study. Time series data which spanned from 1981 to 2019 was sourced from CBN. The data collected was subjected to unit root test, co-integration test and vector error correction estimation. The results showed long run equilibrium among variables. It was found also that there existed short-run relationship among variables or ran from GDP, MNFO, INF and LFP to FDI and recommended improvement in output, inflation control, enhancement of labour force performance, economic diversification and improved security spending and sincere intention in the approach to finding lasting solutions to insecurity among others.

Relationship Between FDI and India’s Foreign Trade: A Cointegration and VECM Approach

Foreign capital inflows have emerged as a powerful tool for transferring capital and technology from other economies, especially developed countries. Globalization has made way for international business to cross borders. Foreign Institutional Investor and Foreign Direct Investment (FDI) are two modes of foreign investment and FDI is one of the best routes to invest across the border. India has also become an attractive destination for investment due to immense growth potential. The whole world has seen the role of foreign investment in acting as a bridge to link the gap between investment and savings. It helps in maintaining transparency among different countries and promotes bilateral trade between the countries. This paper focuses on analyzing the trend of FDIs and exports along with the relationship between exports and FDI with the help of Johansen Cointegration and Vector error correction model (VECM)

Analysis of Energy Consumption and Carbon Emissions in Indonesia

The development process that uses excessive fossil energy in industrial activities impacts increasing carbon emissions in Indonesia. The purpose of this study is to determine how the relationship between energy consumption (EN), economic growth (GDP), carbon emissions (CO2), and human development (HDI) in Indonesia in the Maqashid Syariah review. Using the Vector Error Correction Model (VECM) approach, it is found that in the long run, carbon emissions negatively affect energy consumption. Meanwhile, economic growth and human development positively affect energy consumption. Energy consumption and economic growth positively affect human development in the short term. Meanwhile, carbon emissions hurt HDI, while HDI has a positive effect on carbon emissions. Meanwhile, the Granger causality test results show that HDI has a unidirectional causality relationship with Indonesia's energy consumption, economic growth, and carbon emissions. This result indicates that energy consumption in Indonesia has not provided protection and benefits for the community by Maqashid Sharia, which prioritizes the principle of sustainable development

Effect of real exchange rates on fruit exports in South Africa: A Vector Error Correction Model (VECM) approach

Effect of real exchange rates on fruit exports in South Africa: A Vector Error Correction Model (VECM) approach

Acreage supply response of sugarcane out-growers in Tanzania: A vector error correction model (VECM) approach

Acreage supply response of sugarcane out-growers in Tanzania: A vector error correction model (VECM) approach

Domestic and International Macroeconomic Variables on Indonesian Sharia Stock Index with Vector Error Correction Model Approach

Domestic and International Macroeconomic Variables on Indonesian Sharia Stock Index with Vector Error Correction Model Approach

China's trilemma: Exchange rate marketization, RMB internationalization, and exchange rate pricing power

We employ a threshold vector error correction model approach to investigate the impact of China's exchange rate marketization reform in August 2015 on the linkage between renminbi (RMB) onshore (CNY) and offshore (CNH) exchange rates and the impact of post-reform policy interventions by the People's Bank of China (PBoC) on CNY–CNH linkage. We find that, after the reform, price power over the RMB exchange rate changed from the onshore to the offshore market, in which the CNH significantly leads the CNY, and the CNY ceased to lead the CNH. Since the reform, the PBoC has faced a trilemma of exchange rate marketization, RMB internationalization, and maintenance of the onshore market's pricing power over the RMB exchange rate. The PBoC regained its RMB pricing power by reinforcing control over the onshore exchange rate and tightening offshore RMB liquidity, at the expense of setbacks in both exchange rate marketization and RMB internationalization.

Effect of shipping trade on economic growth in Nigeria: the Vector Error Correction Model (VECM) approach

The maritime industry is significant to the growth and development of nations. The relationship between shipping trade and economic growth in Nigeria is acknowledged in the literature. Still, the need to emphasise the role of shipping import and export volume and exchange rate volatility in Nigeria’s economic growth remains. The economic growth and development level that a maritime nation will derive from its ocean depends on its import and export volumes in the face of exchange rate volatility. Using the Vector Error Correction Model, this study analyses the effect of shipping trade on economic growth in Nigeria from 1970 to 2020. The study examines the effect of seaport imports, exports, and real exchange rates on GDP to determine if Nigeria’s economic growth is sustainable, that is if the current pattern of shipping imports and exports for economic growth will not hamper future economic development. The cointegration test established a short- and long-term causality from import, export and exchange rates to GDP. The result showed that Nigeria’s economic growth is import-dependent and that, in the long run, import and exchange rates significantly affect GDP. The study further indicates that the present export volume does not significantly contribute to GDP growth. The results imply that building an economic system on an import-dominated trade system is not sustainable for future development. The study recommended strategic initiatives to maintain the economic growth rate while promoting export through local production.