The paper focuses on investigating the casual relationshipamongEnergyConsumption, RealGDP, and IndustryValueAdded of Bangladesh using the World Bank Development Indicators data set. The Granger causality approach has been applied to identify the short-run causality direction for all possible pairs of dynamic variables of the study. Results from the approach indicate the unidirectional short run causalrelationship from RealGDP to EnergyConsumption, while another unidirectional short-run causality has been found from IndustryValueAdded to RealGDP. The concept of cointegration and VectorErrorCorrectionModel (VECM) are employed to find the long-run relationships among the variables. Our results show the existence of long run relationship between each pair of variables. Furthermore, the Variance Decomposition (VDC) techniques and Impulse Response Function (IRF) was also used to measure the extent/degree of dynamic properties of the variables. Bangladesh has an emerging economy with limited energy resources. Here, the evidence from our study would help policymakers in setting the appropriate energyconsumption policies that will enhance and sustain economic growth for the welfare/development of this country. Keywords: Granger Causality, Cointegration, VECM, VDC, IRF, IndustryValueAdded
Dahl (1994), in his survey, found that most of the studies on electricity demand used static or partial adjustment models. Jones (1993) compared the forecasting ability of the static and partial adjustments model with the general to specific (GTS) or dynamic regression model and found that the GTS approach was a more superior forecast model. However, Chan and Lee (1997) argued that the GTS approach may overlook the fact that most of the time series data are non-stationary. Their study show that the Engle- Granger approach outperforms Hendry’s ECM and Hendry’s general-to-specific approach in terms of having the smallest ex post forecast errors. Besides the study by Chan and Lee (1997), several other empirical studies also used ECM approach. Asafu- Adjaye (2000), for instance, estimated the causalrelationship between EC and income for India, Indonesia, the Philippines and Thailand, using cointegration and error-correction modeling techniques. He found an unidirectional Granger causality runs from energy to income for India and Indonesia, while bidirectional Granger causality runs from energy to income for Thailand and the Philippines. Hondroyiannis et al. (2002) used VECM approach to empirically examine the relationship between EC and economic growth in Greece. The VECM specification includes EC, realGDP and price developments-a measurement for economic efficiency. The empirical evidence suggested that there is a long- run relationship between the three variables.
A recent study by Belke et al. (2011) examines the long-run relationship between energyconsumption and realGDP, including energy prices for 25 OECD countries. They use principal components analysis to distinguish between developments on an international and a national level as drivers of the long-run relationship. The empirical findings reveal that the international developments dominate the long-run relationship between energyconsumption and realGDP. The results also suggest that energyconsumption is price-elastic, and there is also a bi- directional causalrelationship between energyconsumption and economic growth. In contrast, Gurgul and Lach (2011) analyse the causal links between coal consumption and GDP in the Polish economy. They find the neutrality of hard coal usage with respect to economic growth. This finding indicates that, by closing the hard coal mines in Poland, it should have no significant repercussions on economic growth. In Bangladesh, a recent study by Ahamad and Islam (2011), find that there is a short-run unidirectional causal flow running from per capita electricity consumption to per capita GDP. This finding indicates that an increase in electricity consumption directly affects economic activity in Bangladesh in the short run. However, in the long-run, there is a bi-directional causality running from electricity consumption to economic growth and vice versa.
The first group comprises of studies that find unidirectional causality running from energyconsumption (both aggregate and disaggregate level) to GDP. Yang (2000) found unidirectional causality running from natural gas to GDP for Taiwan. Wolde-Rufael (2004) found unidirectional Granger causality from coal, coke, electricity, and total energyconsumption to realGDP. Sari and Soytas (2004) found that waste had the largest initial impact, followed by oil on realGDP. However, lignite, waste, oil, and hydropower explained the larger amount of GDP variation amongenergy sources within the 3-year horizon respectively. Awerbuch and Sauter (2006) found that RES had a positive effect on economic growth by reducing the negative effects of oil prices volatility either by providing energy supply security or otherwise. Ewing et al. (2007) found that shocks arise due to NRES consumption like coal, gas and oil had more impact
With the passage of time, further grafting fitted it into the possible estimation of the structural VAR (Sims, 1986; Bernanke, 1986; Blanchard and Watson, 1986). This suggested imposing restrictions originating from the theory rather than from some adhoc proposal. Later one, Blanchard and Quah (1989) earned much fame for introducing the long-run restrictions to estimate a structural VAR model; their work was also based on theoretical basis rather than some adhoc proposition. It presumed orthogonal structural shocks, normalized to unit variance, and the presence of at least such a structural shock that could have no long-run effect. For this purpose, it decomposed the series into their temporary and permanent components. It can be elaborated as; let there are two matrices of variables in the system ‘x’ and ‘y’ such that the former one is a matrix of nonstationary variables, whereas the later one is a matrix of stationary variables. In addition, the ‘x’ is I (1). As this practice is mainly concerned with the ‘y’ matrix, so it divides the integrated series into its short-run and long-run components. Avoiding the intercept terms for notational convenience, the moving average representation in the compact form becomes:
The causalrelationship between energyconsumption and economic growth is a well-studied subject in economic literature. In recent years, there has been a renewed interest in examining the relationship between these variables, given the impact that energyconsumption has on climate change. The higher economic growth rates pursued by developing countries are achievable only in association with the consumption of a larger quantity of commercial energy, which is a key factor of production, along with capital, labour and raw materials. Moreover, the social development that represents the demand side of energy depends on the pattern of commercial energyconsumption in an economy. Accordingly, a consumer decides to consume a set of energy products that maximizes his or her utility. From this perspective, energy is seen to play a vital role in the economic and
The primary sector firms prefer debt over equity finance or retained earnings (both in the long-run as well as in the short-run). The primary sector firms make direct use of natural resources and most of the products from this sector provide raw materials for other industries. Major businesses in this sector are agriculture, agribusiness, fishing, forestry, mining and quarrying industries. These firms neither have an easy access to the equity market nor do they have sufficient retained earnings, so the only option they have is of debt. In long-run, these firms prefer debt financing because the long-term debt has an extended payback period of more than 1 year, and it is often up to 20-30 years. Long-term financing is usually used to purchase major assets such as buildings and equipment, and these assets often serve as collateral on the loan. So, as the economy grows these firms move towards leverage (a direct relation of leverage with GDP as well as with BSE is seen) which is not in accordance with the equity market timing theory, but in accordance to trade-off theory.
a financial sector is repressed then it can only respond passively to the real-sector needs. Also, studies by Argrawall and Tuteji (2007), Azam et al. (2016), Levine and Zervos (1998), N‘zue (2006), Ozturk, 2008, Deb and Mukherjee (2008), Acaravci et al., 2009, Nowbutsing (2009), Caporale et al. (2004), Acaravci et al. (2011), Naceur et al. (2007), Schumpeter (1912), Rahman and Salahuddin (2010) conformed to this school. They demonstrated that stock market development is a prerequisite condition for growth even though, Shleifer and Summers (1988), Mayer (1988) and Stiglitz (1993) pointed out strongly that the development of stock exchange markets can be detrimental to economic growth by encouraging counter productive corporate takeovers and promote short-term profits which donotaccord corporate managers a chancet of ocus on the long-term prospects of investment. However, this school of thought was subdivided into Structuralists and Repressionists. The structuralists are of the view that the quantity and the composition of financial variables induce economic growth by directly increasing savings in the form of financial assets, thereby spawning capital formation and economic growth, while the Repressionists on the other hand contend that financial liberalisation in the form of an appropriate positive real rate of return on real cash balances is a vehicle for promoting economic growth. Hence, a liberalized financial system causes an increase in saving and investment. The second school of thought “the demand-following” argued that financial development follows economic growth. They are of the view that as the economy expands, the demand for certain financial instruments increases and this in turn lead to financial market development. The school was supported by the findings of Gurley and Shaw (1960) and Gelb (1989) which argued that growth promotes financial deepening, and that the demand for financial services increases with economic development. In addition, Singh (1997) also maintain that stock markets do not in any way lead to long run economic growth due to macroeconomic instability, volatility and arbitrariness of pricing process. But added Charkravarty (2005) added that stock exchange prices are highly sensitive to some fundamental macroeconomic indicators. He pointed that as the economy expands, the demand for certain financial instruments increases, leading to the growth of these services and the end result is that the developments in macroeconomic activity influences on the stock market development.
Abstract: This paper empirically examines the long-run and short run dynamic effects of deposit rate (r), inflation rate (π) and GDP on bank deposit. The study targeted commercial bank of Ethiopia (CBE) because it has been taking a lion’s share in terms of deposit amount which in turn plays a vital role in deposit refunding for investors. To show the long-run and short run dynamic effects of r, π and GDP on the deposit amount of CBE we took 30 years data from the year 1988 to 2017 from MOFED, CSA, National bank of Ethiopia and CBE data sets. To achieve the objectives vectorerrorcorrectionmodel (VECM) was used after checking the possible assumptions of our economic series. The results of ADF test statistics confirms our economic series are stationary at their first difference. This indicates that the variables are integrated of order one, I (1). Johansen’s co-integration test suggests one co-integrating relationship between the variables. According to our findings, the coefficient of the errorcorrection term for CBE deposit is statistically significant, and the speed of convergence to equilibrium of approximately 16 percent. Hence, in the short run, deposits are adjusted by 16 percent of the past year’s deviation from equilibrium. The joint effect result indicates that except deposit rate all included variables have no significant short-run effect on deposit amount. More specifically, the result of Johansen normalization restriction shows in the long-run on average inflation rate and GDP have a negative effect on deposit, while deposit rate has a positive effect on the total amount of deposit held by CBE, among other findings. Finally, the government and other concerned bodies should take necessary steps to mobilize deposit in CBE.
and high inflation, with poor performing microeconomic variable indicators. As a result of this, the government needs to cut down on its expenditure and find ways of increasing its revenue in order to improve the fiscals in the country and also increase economic growth. From the study, it is derived that there is an inverse relationship between government capital expenditure and government total revenue, in that when government revenue is increased, government capital expenditure is decreased. From literature it is ascertained that when government invest more into recurrent expenditure it reaches a point that this expenditure does not promote economic growth but rather slows growth by increasing budget deficit and increasing public debt. But if government invests in capital expenditure instead, from literature it propels future growth of the country as these capital investments pays for itself. However, from the economic situation in Ghana at the moment, it can be said that although government is investing in capital expenditure, the proportion of investment as compared to investment in recurrent expenditure is inadequate. This therefore is having a negative impact on the fiscals as well as future growth if care is not taken. So for a fiscal policy direction, it will be advised that government increases its investment in capital expenditure and reduces that of recurrent expenditure in order to propel future growth and also be able to pay for the interest on its public debt as well the debt itself. Investment into manufacturing and industrial infrastructures with the private sector in mind and generating revenue from usage is one of the ways this could be done.
The model estimates a short-run income elasticity of 0.94 which is higher than the estimated long-run income elasticity of 0.105/0.188 = 0.56. This result, where short-run income elasticity is higher than long-run income elasticity, has also been observed in other countries (Hunt and Manning  for UK and Amarawickrama and Hunt  for Sri Lanka). They argued that an increase in income causes “an immediate increase in derived demand for energy in the short-term, but this derived demand is reduced in the longer-term as more energy efficient machines are installed” (Hunt and Manning ). In the Philippines, some indication of energy efficiency can be observed during the period 2003- 2014, coinciding with the second half of the estimation period. Energy efficiency may be measured by energy intensity, defined as electricity consumption per unit of output. Energy intensity steadily declined from 13.21 GWh/billion pesos in 2003 to 10.78 GWh/billion pesos in 2014 or an average decline of 1.8% per year. This suggests that, during the 2003- 2014, the Philippines was producing more output with less energy.
Based on the findings, we recommend that several measures could be implemented in the short term to strengthen the interest rate channel. The interest rate should be emphasized on in order to stimulate the real output. Also, monetary policy transmission through the credit channel and exchange rate channel should continue to be strengthened by tightening creditworthiness standards; strengthening accounting standards, bankruptcy laws, corporate governance, and credit rights; improving bank credit assessment capabilities; and strengthening the judicial system to improve banks’ ability to enforce on collateral. In addition to ensure the effectiveness of the credit channels, the monetary authority should maintain a low and stable inflationary level. Finally, the monetary policy channel variables can be used to forecast the performance of real output in Nigeria.
Table 2 shows that SBIC suggested a lag length of 1 as optimal, while AIC indicated 4 lag as optimal lag length. But in this study of series (GDP, TOUR, and AVLS) for co-integration analysis 4 lag lengths has been adopted because 1 lag length could not be found the co-integrating vector under both trace and maximum Eigen value statistics(Table 3) while at lag length 4 could be found one co-integrating vector under both these statistics.
The VectorErrorCorrection Models (VECM) are often used in the statistical analysis of nonstationary variables since they allow to describe several features. In particular the cointegration analysis of equilibrium relationships between variables is much considered in theoretical research. The dominant test for determining the number of equilibrium relationships, the cointegrating rank, is the Likelihood Ratio (LR) test developed by Johansen (1988,1991). Noting that this test depend on the specification of the deterministic part of the VECM, Johansen (1994) proposed LR tests based on his likelihood procedure for testing restrictions on the deterministic parameters. However it is well known that the likelihood inference proposed by Johansen for the analysis of the long run relationships and the deterministic terms strongly depend on the choice of the lag length. Indeed if the short run dynamics are over specified this can entail a loss of efficiency in our multivariate framework since a large number of parameters are introduced in this case. Some authors found that the LR test for the cointegrating may suffer from a substantial loss of power in such a case (see e.g. Boswijk and Franses (1992)). If the short run dynamics are under specified the residuals become autocorrelated and the asymptotic theory underlying the Johansen’s procedure breaks down (Johansen (1995), Theorem B.13 p 251). Hence the LR test for the cointegrating
The concern with developing emerging countries’ financial markets triggered the liberalization process. This latter process called for major regulatory changes in order to facilitate foreign investors’ access to domestic markets. Increase in capital flows helps to increase liquidity, reduce debt cost and improve profitability of some projects. In this paper, we study empirically international financial integration of MENA countries in developed countries in order to detect the meaning of international portfolio diversification. The first section of this paper reviews the relevant literature on the main financial integration studies. The second section analyzes financial cointegration between the different countries of our sample using for the purpose the different cointegration and causality tests and the errorcorrectionvectormodel (VECM).
One of the main rationales for taxing consumption rather than income is that it is believed that consumption taxes discourage consumption, encourage savings, and thus generate higher economic growth. However, empirical evidence on the actual effectiveness of consumption taxes in stimulating savings is very limited. In this paper, we estimate the impact of a broad- based consumption tax, the value-added tax (VAT), on the aggregate consumption of fifteen European Union (EU) countries over the period 1961-2005. Our empirical results indicate, across a variety of estimation methods and specifications, that a one percentage point increase in the VAT rate leads to roughly a one percent reduction in the level of aggregate consumption in the short run and to a somewhat larger reduction in the long run.
macroeconomic variables for the period between 1980 and 2018 in the Mediterranean region. Analyses accounts for assessing the significance of the natural gas consumption on the industryvalueadded (IVA) using fixed-effects panel data regression. In addition to that, this contribution evaluates the causal link between the variables cited above. Empirical findings indicate that there is a significant relationship between IVA and NGC. Furthermore, these two latter variables showcase a mutual causality in a sense that an increase in each of these
. The three economies, China, Indonesia and India were the only exception of not showing negative GDP growth and remained resilient in the face of the intense global crisis and recession (Das DK, 2010, 2011). The study uses sectoral indices and the Sensex for transmission of information and understanding its pattern across various sectors which may have utility for institutional investors for emerging markets. A few studies were done using sector indices as a benchmark to track performance of actively managed portfolios (Ewing 2002; Ewing et al. 2003; Wang et al. 2005). Some research conducted using multivariate cointegration analysis by VECM for studying transmission of information are by Fayoumi et al.(2009) for sector index of Amman Stock Exchange (ASE), Poshakwale S & Patra T(2008) for long-run and short-run relationship between major stock indices of the Athens Stock Exchange (ASE),Wang & Yang (2005) for major sector indices of Chinese stock exchange, Ewing BT(2002) for five S&P stock indices and Arbelaez H et al. (2001) for interlinkages of the Colombian stock exchange. These studies have highlighted utility and importance of usage of sector indices; some exhibited long-run relationship as well as short-run relationship, and also exhibited transmission of innovation to
exports in Nigeria. Data was collected from CBN Statistical Bulletin and UNCTAD investment report from 1990 to 2016, and various diagnostic tests such as Unit Roots and Johansen conitegration were estimated. Consequently, VectorErrorCorrectionmodel was employed to address the objective of this study. It was established from this study that a long-run relationship between FDI inflows, oil exports, exchange rate and inflation existed in Nigeria, while the errorcorrection term submits that about 38% error made in the previous year was corrected in the current year in the country. However, the findings that emerged in this work necessitated the following recommendations for the policy makers, investors and future researcher. The policy makers in Nigeria should see oil exports among others as the backbone behind the inflows of FDI in the country and should be sustained. In addition, the proceeds from oil exports should be diversified and invested in the non-oil sub sector of the economy in order to stimulate a favourable exchange rate which can further encourage further inflows of FDI in the country. Finally, it is needful to ensure that the policy measures are initiated and implemented without a delay for the desired effects to be reflected on time in the country.