Vector Error Correction Model Estimation Research Articles

The Effect of Internal and External Factors of Banking to the SMEs Financing for BPRS in Indonesia

Small and Medium Enterprises had a strategic role in economic growth. One of the main problems faced by SMEs in Indonesia was the limited financial capital and access to finance. Islamic Rural Banks (BPRS) could play a significant role in providing financing for the development of the real sector through SMEs. This study aimed to analyze the influence of internal and external factors of banking to the SMEs financing for BPRS in Indonesia 2011-2016 periods using the Vector Error Correction Model (VECM) method. In the long-term of VECM estimation result showed that third-party funds, FDR, inflation, and IPI had a significant positive effect on SMEs financing, while BOPO, NPF, ERP, and BSBIS variables negatively affected SMEs financing. This study recommended the importance of increasing the proportion of SMEs financing in line with the increase in the number of third-party funds and putting more funds in the real sector than in the monetary sector. DOI : https://doi.org/10.26905/jkdp.v21i3.1221

The long-run relationships between energy efficiency and environmental performance: Global evidence

Owing to recent climate change concerns, the interaction between energy and environmental governance has received greater attention. Therefore, this study investigates the causal relationship between energy efficiency and environmental performance for 129 countries, using the panel cointegration and panel-based error correction models for the period 2002–2012. Our results corroborate that there exists a long-term equilibrium cointegrating relationship between energy efficiency and environmental performance, and that the panel fully modified ordinary least squares estimations present a positive relationship between variables. In accordance with the panel vector error correction model estimation, evidence confirms a bi-directional causal relationship among variables for the long term in the given sample of 129 countries. In addition, the sub-samples’ analyses present causalities running from energy efficiency to environmental performance in the long run, no matter for Organisation for Economic Co-operation and Development (OECD) or non-OECD countries, but a short-run relationship is seen only in OECD members. Evidence also shows an absence of causal direction from environmental performance to energy efficiency in both groups of countries. The policy implication is that an improvement in environmental quality should be based on promoting energy efficiency. However, given that energy efficiency still has not achieved improvement under strong environmental performance, this is a big challenge that cannot be avoided for both developing and developed countries. We also offer several constructive suggestions for how to promote energy efficiency.

Money Demand in Korea: A Cointegration Analysis, 1973-2014

<p class="ber">This paper estimates the demand for real money in Korea over the 1973Q3 to 2014Q4 period via unit root and cointegration methods. Utilizing the Johansen cointegration methodology and the Pantula principle, it establishes that a long-term relationship exists among the included variables. The paper also estimates an error correction model (ECM) as well as a vector error correction model (VECM), extending previous analyses by performing forecasts and testing for Granger causality among the variables. It finds that the broader definition of money, M2, serves as a relatively better measure of the money aggregate than M1 when evaluating the stability of the real demand for money. The long-term interest (LR) rate also seems to provide better results than the short-term rate (SR), which is consistent with economic theory given that it refers to a long-run equilibrium relationship. Both the ECM and VECM estimates showed the expected (and significant) signs on the coefficients; LM2 (LM1) and LGDP were positively related and LM2 (LM1) and LR (SR) were negatively related. Granger block causality tests and impulse response functions together seem to suggest that the traditional money demand function which places M as its ‘dependent’ variable, while including income and interest rates as its regressors, was a robust and stable model in the case of Korea.</p>

Public versus private investment in economic growth of Bangladesh: an econometric analysis

This paper analyses the roles of per capita real public and private investment growths in influencing per capita real GDP growth in Bangladesh spanning over 1972-2012. Autoregressive Distributed Lag (ARDL) procedure is applied for co-integration and Vector Error-Correction Model (VECM) is implemented for long-run and short-run dynamics. All three variables are found co-integrated. The findings from the estimates of VECM reveal long-run convergence with very slow speed of adjustment. The short-run dynamic interactive feedbacks among the variables are weak. Apparently, private investment plays a greater role than public investment in improving per capita real GDP growth in Bangladesh. The paper contributes to the existing body of literature in terms of applying improved econometric methodology and for a country (Bangladesh) for which no such rigorous study on this issue has yet been undertaken, to our knowledge.

Foreign capital flows, exports and growth in Zambia

This study investigates the causality between FDI net inflows, exports and GDP using Vector Error Correction Model (VECM) approach. The words foreign capital flows and FDI are used interchangeably in this study. The findings from the VECM estimation technique is six fold: (1) the study revealed a long run causality relationship running from exports and GDP towards FDI, (2) the study showed a non–significant long run causality relationship running from FDI and exports towards GDP and (3) the existence of a weak long run causality relationship running from FDI and GDP towards exports in Zambia. The study also found out that no short run causality relationship that runs from FDI and exports towards GDP, short run causality running from FDI and GDP towards exports does not exist and there is no short run causality relationship running from exports and GDP towards FDI. Contrary to the theory which says that FDI brings along with it a whole lot of advantages (FDI technological diffusion and spill over effects), the current study found that the impact of FDI in Zambia is not significant in the long run. This is possibly because certain host country locational characteristics that ensures that Zambia can benefit from FDI inflows are not in place or they might be in place but still not yet reached a certain minimum threshold levels. This might be an interesting area for further research. On the backdrop of the findings of this study, the author recommends that the Zambian authorities should formulate and implement export promotion strategies and economic growth enhancement initiatives in order to be able to attract more FDI.

Effectiveness of Conventional and Syariah Monetary Policy Transmission

Objective - The purpose of this study is to compare the effectiveness of monetary policy transmission through conventional and Islamic instruments through the interest rate channel and profit loss sharing / margins channel, to control the price level (inflation) and economic growth (output) Method – Methodology used in this study is the Vector Auto Regressive (VAR) / Vector Error correction model (VECM) to see the effect of shock and long-term effects on inflation and output. Variables used are sbi interest rates, PUAB interest rate, deposit rates and lending rates, as well as from the Islamic side is SBIS yield, yield PUAS, profit lost sharing for the deposits and margin financing. This study use Unit Root Test, Cointegration degree of integration test, test causality, VECM and IRF estimates. Using monthly time series data from 2009 s / d 2012. Result – Results of the study showed that the test based on Granger causality, overall, the transmission channel of monetary policy according to the conventional theory, while the monetary policy transmission channel Sharia can not be clearly identified and disconnected in yield / profit and loss sharing deposits. And based on the estimated VECM is known that in the long term Islamic instruments is the right instrument to control inflation. Conclusion – This finding concluded that syariah instruments is the effective instrument in reducing inflation rate and also encourage the growth of Islamic banking, and should also consider the right margin level to increase the output on real sector. Keywords : Monetary Transmission, Central Bank, Industrial Production Index, Consumer Price Index

Growth and Productivity in Australia

This paper empirically investigates and identifies the main contributing factors to output and productivity growth in Australia for the period 1950-2005. Cointegration and a vector error-correction model are used along with Granger causality tests, impulse response functions and forecast error variance decomposition analyses to achieve these objectives. Accumulation of human capital and investments in information and communications technology (ICT) are identified as significant in the cointegration analysis of production in Australia and should be included in the long-run production relationship along with fixed capital and labour employed. The vector-error correction model estimates further provide evidence that human capital and ICT are important drivers of output growth in Australia, so their omission from standard productivity measures leads to inaccurate measures and may mislead policy formulation, planning and budgeting decisions.

The Influence of Oil Prices on Stock Market Returns: Empirical Evidence from Oil Exporting and Oil Importing Countries

The aim of this paper is to study the impact of oil price fluctuations on the stock markets and the interest ratesfrom oil importing and oil exporting countries. To this end, Vector Autoregressive (VAR) models are estimatedand pairwise Granger Causality tests are performed to the stationary series in order to analyse the short-termrelationships among the variables. Also, the Johansen approach for multiple equations is carried out in order totest for cointegration among the series. Finally, the existence of cointegration set the estimation of VectorError-Correction Models (VECMs) to investigate the long-term links between the financial variables and the oilprices. The major findings of this paper include: first, the interaction between the oil prices and the stockmarkets is much stronger than with the interest rates in the short and in the long-run. Second, the impact on oilimporting countries is more significant than on oil exporting countries. Finally, it might be possible that thefluctuations in oil prices have different effects on developed and developing countries.

Transportation–Communication Capital and Economic Growth: A VECM Analysis for Turkey

This paper analyses the short- and long-term relationships between the transportation–communication capital and the output for Turkey. The study applies a Cobb–Douglas production function under the assumption of constant returns to scale and employs co-integration analysis by estimating a vector error correction model (VECM). As a result of the VECM estimation, one co-integrating relationship is detected. The results based on the impulse response function analysis imply that per labour transportation–communication capital appears both to have been a crucial input in the Turkish productive process and to have had a positive crowding in effect on the per labour non-residential total capital formation. Moreover, the results support the argument that the transportation–communication capital has a lagged impact on economic growth. The long-term accumulated elasticity of output to transportation–communication capital has been found to be 0.59. The long-term accumulated marginal product was also calculated. It implies that a 1 Turkish Lira increase in per labour transportation–communication capital results in a long-term rise of 1.45 Turkish Liras in per labour output. All these findings suggest that transportation–communication capital may be a powerful tool for policy-makers to promote long-term per labour real output growth in Turkey.

Generalized least squares estimation for cointegration parameters under conditional heteroskedasticity

In the presence of generalized conditional heteroscedasticity (GARCH) in the residuals of a vector error correction model (VECM), maximum likelihood (ML) estimation of the cointegration parameters has been shown to be efficient. On the other hand, full ML estimation of VECMs with GARCH residuals is computationally difficult and may not be feasible for larger models. Moreover, ML estimation of VECMs with independently identically distributed residuals is known to have potentially poor small sample properties and this problem also persists when there are GARCH residuals. A further disadvantage of the ML estimator is its sensitivity to misspecification of the GARCH process. We propose a feasible generalized least squares estimator which addresses all these problems. It is easy to compute and has superior small sample properties in the presence of GARCH residuals.

The dynamic relationship between the US GDP, imports and domestic production of crude oil

This article investigates the dynamic relationship between crude oil imports, gross domestic product (GDP) and domestic crude oil production of the United States using a Vector Error Correction model estimation, generalized impulse response functions, persistence profile and variance decompositions. This article results suggest that the GDP has a leading role in determining oil imports.

A Study on the Price Discovery in Korea Stock Index Markets: KODEX200, KOSPI200, and KOSPI200 Futures

This paper examines the price discovery process among the Korea stock index markets using the vector error correction model (VECM) and the multivariate generalized auto regressive conditional heteroskedasticity (M-GARCH) model. The minute-by-minute price series of the KOSPI200 index, KOSPI200 futures, and KODEX200 are cointegrated. The empirical results are summarized as follows: First, VECM estimation results indicate that when the cointegrating relationship is perturbed by the arrival of ntis, the KODEX200(ETF) does not adjusted to restore equilibrium. This is the task of the KOSPI200 futures and spot. These two index securities use the KODEX200 to represent the ntioequilibrium price, with the KOSPI200 futures responding faster than the KOSPI200 spot. When the cointegrating relationship betweeiesOSPI200 spot and futues is perturbed by the arrival of ntis, the KOSPI200 spot does adjusted to restore equilibrium. Next, the results from the multivariate GARCH modes indicate that the volatilities of esOSPI200 spot and futures markets suggest unidirectiona1volatility spillover from KOSPI200 futures to KOSPI200 spot. KODEX200(ETF) volatilities spill over bothesOSPI200 spot and futures markets. and this happen in the reverse direction with a strong effect from the KODEX200 to KOSP200 futures and spot. The overall findings indicate that the KODEX200(ETF) market dominates KOSPI200 futures and spot in the price discovery process. The regulation of Instutional traders on trading on futures markets explains its superior price discovery function.

Regional productivity and relative prices dynamics: the case of Italy

In this paper, we study the cointegrating space spanned by Italian regional relative prices and per capita GDPs. To this end, we combine panel data with vector error correction model estimation in an innovative approach which is still under development. The results are interesting: regional prices, which seem to persistently deviate from the law of one price (PPP), cointegrate with relative per capita GDPs. The estimated elasticity is not consistent with the Balassa–Samuelson hypothesis but is closer to supporting the classical supply-demand schedule. Weak-causality testing gives further details on linkages between the real and nominal side of Italy’s regionally diversified economy. Homogeneity of the coefficients, lacking at a national level, can be recovered at a more disaggregated macro-area level.

Energy consumption and economic growth: assessing the evidence from Greece

This paper attempts to shed light into the empirical relationship between energy consumption and economic growth, for Greece (1960–1996) employing the vector error-correction model estimation. The vector specification includes energy consumption, real GDP and price developments, the latter taken to represent a measure of economic efficiency. The empirical evidence suggests that there is a long-run relationship between the three variables, supporting the endogeneity of energy consumption and real output. These findings have important policy implications, since the adoption of suitable structural policies aiming at improving economic efficiency can induce energy conservation without impeding economic growth.

Do Demographic Changes Affect Fiscal Developments?

This article analyzes the effects of demographic changes (low fertility rates and a high old-age dependency ratio) on fiscal developments (debt, expenditure, tax revenues, social security expenditure, and social welfare revenues to GDP ratios) in Greece over the period 1960 to 1995. The empirical evidence suggests that there is a long-run relationship between each fiscal variable and the two demographic variables. The estimation results show that in the long-run the double-aging process-an increase in the old-age dependency ratio and a decrease in the fertility rate-will increase the size of public debt and total expenditure while decreasing total tax revenues. Similar results are obtained for the social security budget. Using vector error correction model estimation, the results support the proposition that the double-aging process is responsible for the deterioration of fiscal development. The results have important policy implications because the adoption of suitable policies should help improve budget developments, facilitating the real convergence of the Greek economy.

The CFAF Devaluation, Naira Parallel Exchange Rate and Niger's Competitiveness

Niger's competitiveness with Nigeria decreased significantly during the last decade, and the recent CFAF devaluation did not actually result in a sustained real and nominal depreciation of this currency versus the naira in the parallel market. To understand this behavior of the naira/CFA exchange rate, this article builds upon a simple model of arbitrage taking into account two main motives for foreign currency demand by Nigerians (dollar and CFAF): the international trade-via-transit motive and the capital transfer motive. Econometric results from vector error correction model estimates show that the CFAF and the dollar are viewed by Nigerians as very close substitutes, and that this continued even in the aftermath of the August 1993 decision to limit CFAF convertibility and the January 1994 devaluation. Such results, which seem to reflect the substantial role played by the demand for transit import by Nigerians via such CFA countries as Niger, are also used to explain the continuous decline in Niger's competitiveness with regards to Nigeria in terms of locally produced goods. Copyright 1997 by Oxford University Press.

ON EXPORT‐LED GROWTH IN AUSTRALIA AND CANADA: COINTEGRATION, CAUSALITY AND STRUCTURAL STABILITY*

This paper uses cointegration and vector‐error correction (VEC) modelling to investigate whether the export‐led growth hypothesis applies to Australian and Canadian exports and labour productivity. The Johansen (1988) procedure is used to test whether manufacturing and aggregate measures of exports and labour productivity are cointegrated. Exports and labour productivity are found to be cointegrated, suggesting the export‐led growth hypothesis holds for the small, open Australian and Canadian economies, although the estimated cointegrating vectors suggest the relationship is of small order. The tests suggested in Hansesn (1992), for parameter stability in relationships with I(1) variables, are estimated to examine if the parameters estimated from the Johansen procedure are unstable and whether the null of cointegration can be rejected in favour of structural change. No evidence is found of parameter instability in either the Australian or Canadian long‐run relationships at conventional significance levels. Estimation of VEC models suggests that exports are seen to cause productivity growth, although the quantitative impacts are again small. The reverse causality is rejected for both countries, except for the Canadian manufacturing sector for which there is a small, significant positive effect of labour productivity on manufactured exports.