Abul M. M. Masih

ENERGY CONSUMPTION, REAL INCOME AND TEMPORAL CAUSALITY: RESULTS FROM A MULTI-COUNTRY STUDY BASED ON COINTEGRATION AND ERROR-CORRECTION MODELLING TECHNIQUES

Abstract Unlike previous studies on the causal relationship between energy consumption and economic growth, this paper illustrates how the finding of cointegration (i.e. long-term equilibrium relationship) between these variables, may be used in testing Granger causality. Based on the most recent Johansens multivariate cointegration tests preceded by various unit root or non-stationarity tests, we test for cointegration between total energy consumption and real income of six Asian economies: India, Pakistan, Malaysia, Singapore, Indonesia and the Philippines. Non-rejection of cointegration between variables rules out Granger non-causality and imples at least one way of Granger-causality, either unidirectional or bidirectionial. Secondly, by using a dynamic vector error-correction model, we then analyse the direction of Granger-causation and hence the within-sample Granger-exogeneity or endogeneity of each of the variables. Thirdly, the relative strength of the causality is gauged (through the dynamic variance decomposition technique) by decomposing the total impact of an unanticipated shock to each of the variables beyond the sample period, into proportions attributable to shocks in the other variables including its own, in the bivariate system. Results based on these tools of methodology indicate that while all pair-wise relationships shared common univariate integrational properties, only relationships for three countries (India, Pakistan and Indonesia) were cointegrated. For these countries, temporal causality results were mixed with unidirectional causality from energy to income for India, exactly the reverse for Indonesia, and mutual causality for Pakistan. The VDCs were not inconsistent with these results and provided us with an additional insight as to the relatively more dominant direction of causation in Pakistan. Simple bivariate vector-autoregressive models for the three non-cointegrated systems did not indicate any direction of causality, significantly in either direction.

On the temporal causal relationship between energy consumption, real income, and prices: Some new evidence from Asian-energy dependent NICs Based on a multivariate cointegration/vector error-correction approach

Abstract Departing from previous studies on the causal relationship between energy consumption and economic growth, this paper illustrates how the finding of cointegration (i.e., long-term equilibrium relationship) between these variables, may be used in testing Granger causality. Based on the most recent Johansens multiple cointegration tests preceded by various unit root or nonstationarity tests, we test for cointegration between total energy consumption, real income, and price level of two highly energy dependent East-Asian NICs: Korea and Taiwan. Nonrejection of cointegration between variables rules out Granger noncausality and implies at least one way of Granger causality, either unidirectional or bidirectional. Secondly, by using a dynamic vector error-correction model, we then analyze the direction of Granger causation and hence the within-sample Granger exogeneity or endogeneity of each of the variables. Thirdly, the relative strength of the causality is gauged (through the dynamic variance decomposition technique) by decomposing the total impact of an unanticipated shock to each of the variables beyond the sample period, into proportions attributable to shocks in the other variables, including its own, in the multivariate system. Finally, these response paths of shocks to the system are traced out using impulse response graphs. Results based on these four dynamic tools of analysis broadly indicate that all three variables are cointegrated and mutually causal. The Granger-causal chain implied by our evidence tends to suggest that although all these variables are endogenous (i.e., they all share the brunt of adjustment to reestablish the long-term equilibrium), relatively in these two highly energy-dependent economies, in line with expectations, it is the rate of price change that leads to the change in energy consumption, which then leads on to the change in economic growth. Overall, shocks to the system seemed to have had a more sustained if not pronounced effect in Korea than in Taiwan.

Long and short term dynamic causal transmission amongst international stock markets

Abstract This paper investigates the dynamic causal linkages amongst nine major international stock price indexes. In order to gauge the causal transmission patterns we employ very recent methods of: (i) vector error-correction modeling and (ii) level VAR modeling with possibly integrated and cointegrated processes, advocated by: (i) Toda and Phillips (Econometrica, 61 (1993) 1367) and (ii) Toda and Yamamoto (J. Econometrics, 66 (1995) 225), respectively. The paper illustrates how such methods may be appropriately augmented in a compatible fashion to unearth previously unfounded linkage properties inherent amongst a system of stock price indexes. In particular, we demonstrate that previous research, by using ordinary difference VARs, ignored an important component of linkages displayed purely over the long run. This untapped evidence essentially provides robust and very useful information to international financial analysts and investors. At a substantive level, results of this study tend to support the contention offered by several studies in the literature of significant interdependencies between the established OECD and the Asian markets, and also the leadership of the US and UK markets over the short and long run. The levels VAR, however, illustrate the Japanese markets influence as an additional long run leader. Findings seem to be plausible given that these three markets (US, UK and Japan) have consistently contributed over 75% of global stock market capitalization over the major part of the sample under consideration. At a methodological level, this analysis also provides a primer for the wealth of applied financial econometric research focusing on dynamic causal inference which involve systems containing possibly integrated and cointegrated processes.

A multivariate cointegrated modelling approach in testing temporal causality between energy consumption, real income and prices with an application to two Asian LDCs

Unlike previous studies on the casual relationship between energy consumption and economic growth, this paper illustrates how the finding of cointegration(i.e. long-term equilibrium relationship) between these variables, may be used in testing Granger causality. Based on the most recent Johansens multiple cointegration tests preceded by various unit root or nonstationarity tests, we test for cointegration between total energy consumption, real income and price level of two Asian LDCs: Thailand and Sri Lanka. Nonrejection of cointegration between variables rules out Granger noncausality and implies at least one way of Granger-causality either unidirectional or bidirectional. Secondly, by using a dynamic vector error-correction model, we then analyse the direction of Granger-causation and hence the within-sample Grangerexogeneity or endogeneity of each of the variables. Thirdly, the relative strength of the causality is gauged (through the dynamic variance decomposition technique) by decomposing the total impact of an unanticipated shock to each of the variables beyond the sample period, into proportions attributable to shocks in the other variables including its own, in the multivariate system. Finally, these response paths of shocks to the system are traced out using impulse response graphs. Results based on these four tools of methodology, broadly indicate that all three variables are cointegrated and exhibit two common trends within each system. Energy consumption seems to be relatively exogenous as neither income nor prices seems to Granger cause this variable via any of the channels where potential casuality may occur. Though, energy consumption itself plays an important role in influencing income and prices by varying degrees of significance for each country. Overall, shocks to the system seemed to have had a more sustained if not pronounced effect in Thailand than in Sri Lanka.

Dynamic linkages and the propagation mechanism driving major international stock markets: An analysis of the pre- and post-crash eras

The stock market crash of October 1987 earmarked fears of a deep-seated financial crisis. In recent years, while there has been a number of empirical studies devoted to examinations of the number of common trends in a system of stock price indexes, only a minority has focused on what effect the crash has had on the characteristics [namely, the amount of co-movements amongst markets, their dynamic linkages, and implications for the transmission or propagation mechanism] of major stock markets. In this paper, we demonstrate how the techniques of unit root testing, cointegration, vector error-correction modelling (VECM) and forecast error variance decomposition (VDC) analysis, may be used to shed some light on these concerns in the context of six major international stock markets. Using two non-overlapping samples, we find evidence of a single conintegrating vector (or five common trends) over each of the pre-and post crash samples. A VECM is then constructed in which the temporal causal dynamics are examined, followed by decomposing the total impact of an unanticipated shock to each of the variables beyond the sample period, into proportions attributable to shocks in the other variables including its own. Results tend to broadly indicate: 1. the crash does not appear to have affected the relative leading role played by the US market over other markets, 2. the German and British markets seem to have become more dependent on other markets over the post-crash era relative to the pre-crash, 3. finally, this paper also provides confirming evidence that, in general, the crash has brought about a greater interaction amongst markets, with a greater role for fluctuations in explaining shocks across markets (including that for the US).

A comparative analysis of the propagation of stock market fluctuations in alternative models of dynamic causal linkages

The patterns of dynamic linkages are examined among national stock prices of four Asian Newly Industrializing Countries stock markets - Taiwan, South Korea, Singapore and Hong Kong - in models incorporating the established markets of Japan, USA, UK and Germany. Recent time-series techniques are employed, including unit root testing, multivariate cointegration, vector error-correction modelling (VECM), forecast error variance decomposition (VDC) and impulse response functions (IRFs). The results consistently appear to suggest the relatively leading role of all established markets in driving fluctuations in the NIC stock markets. In other words, all established markets and Hong Kong, consistently were the initial receptors of exogenous shocks to the (long-term) equilibrium relationships and the other NIC markets, particularly the Singaporean and Taiwanese markets had to bear most of the burden of short-run adjustment to re-establish the long-term equilibrium relationship. In comparison to all other NIC markets, Taiwan and Singapore appear as the most endogenous, with Taiwan providing evidence of its short-term vulnerability to shocks from the established markets.

Macroeconomic activity dynamics and Granger causality: New evidence from a small developing economy based on a vector error-correction modelling analysis

Abstract The main purpose of this paper is to discern the dynamic causal chain (in the Granger (temporal) sense rather than in the structural sense) among real output, money, interest rate, inflation and the exchange rate in the context of a small Asian developing economy, such as Indonesia. The methodology employed uses various unit root tests and Johansens cointegration test followed by vector error-correction modelling, variance decompositions, and impulse response functions in order to capture both the within-sample and out-of-sample Granger causal chain among macroeconomic activity. Given the inward-oriented growth strategy of this small developing economy, where the real output was vulnerable to vicissitudes of the agricultural sector and exports (particularly oil), our results are quite in line with our expectations, and tend to suggest that in the Granger-causality sense, output was relatively the leading variable being the most exogenous of all, and all other variables including money supply, rate of interest, exchange rate, and prices had to bear the brunt of adjustment endogenously in different proportions in order to accommodate that real shock. The Granger-causal chain implied by our evidence that real output more often predominantly leads (rather than lags) money supply and the other three endogenous variables, is consistent more with the recent real business cycle (RBC) theory than with the other two major macroeconomic paradigms such as the Keynesian and the monetarist. This finding has clear policy implications for any accommodative and/or excessive monetary expansion since it is likely to be dissipated in terms of relatively higher nominal variables, such as prices, exchange rates or interest rates rather than real output, for a small developing economy like Indonesia in the context of a relatively unstable macroeconomic environment.

Stock-Watson dynamic OLS (DOLS) and error-correction modelling approaches to estimating long- and short-run elasticities in a demand function: new evidence and methodological implications from an application to the demand for coal in mainland China

In this paper robust elasticity estimates of coal demand for China are derived using annual data 1953-92. In so doing, we illustrate the use of a powerful yet practically convenient and recently developed modelling procedure devised by Stock and Watson (known as Dynamic OLS (DOLS)), who provide evidence, based on Monte Carlo simulations, of this estimator being superior in small samples compared to a number of alternative estimators, as well as being able not only to accommodate higher orders of integration but also to account for possible simultaneity within regressors of a potential demand system. Furthermore, cointegration and error-correction methods are employed to derive short-run price and income elasticities. Estimated results are quite robust not only in terms of statistical prowess but also in terms of economic intuition and indicate that, over the long run, both price and income elasticities are close to unity. While short-run price and income elasticities are less (in absolute value) than their long-run counterparts, there seems to be some divergence in short-run parameters from a subsample analysis. Overall, results seem to imply that for China, coal consumption should remain relatively constant as future modernization strategies for economic development are pursued. In addition, the study has clear methodological implications for estimating the long- and short-run elasticities in a demand function in general, and in a wide variety of fields in future applied research.

Empirical tests to discern the dynamic causal chain in macroeconomic activity: new evidence from Thailand and Malaysia based on a multivariate cointegration/vector error-correction modeling approach

Abstract The primary aim of this paper is to make an initial attempt to conduct empirical tests in order to discern the dynamic causal chain—in the Granger (temporal) sense rather than in the structural sense—among real output, money, interest rate, inflation, and the exchange rate in the context of two small Southeast Asian developing economies, such as Thailand and Malaysia. The methodology employed uses various unit root tests and Johansens cointegration test followed by vector error-correction modeling, variance decompositions, and impulse response functions in order to capture both the within-sample and out-of-sample Granger-causal chain among macroeconomic activity. Given the relatively stable macroeconomic environment in these two growth-oriented economies, the results, quite in line with our expectations, tend to suggest that in the Granger-causality sense, money supply (particularly MI) appears to have played the leading role of a policy variable being the most exogenous of all, and the other variables including output, rate of interest, exchange rate, and prices appear to have borne most of the brunt of short-run adjustment endogenously in different proportions in order to re-establish the long-run equilibrium. The Granger-causal chain implied by our evidence that money supply (particular M1) more often predominantly leads (rather than lags) output and the other three endogenous variables, is consistent more with the Keynesian (in the case of Thailand) and the Monetarist (in the case of Malaysia) than with the recent Real Business Cycle macroeconomic paradigm. This finding has clear policy implications in the sense that, as long as there is stability and continuation of economic policies (regardless of change of governments) within the framework of a proper macroeconomic discipline (implying thereby an expectation-augmented supply curve being not completely vertical), a monetary expansion in a small developing economy will not necessarily be dissipated merely in terms of higher nominal variables (such as prices, exchange rates, or interest rates) but will contribute positively to assist in achieving an impressive rate of economic growth, as happened in both Thailand and Malaysia for the major part of the period under review.

A Reassessment of Long-Run Elasticities of Japanese Import Demand

Unlike the findings of Mah (1994) [Mah, J.S. (1994) Japanese Import Demand Behaviour: The Cointegration Approach. Journal of Policy Modeling 16:291–298] who, based on the Engle–Granger test of cointegration, fails to find evidence of a long-run relationship among variables associated with an import demand function for Japan, in this analysis the Johansens MLE multivariate cointegration procedure reveals that such variables seem to be cointegrated, and thus share a long-run equilibrium relationship. Furthermore, the recently prescribed Stock and Watson (1993) Dynamic OLS (DOLS) procedure, which, apart from being superior to a number of alternative estimators, is robust to small sample and simultaneity bias as well as being able to accommodate higher orders of integration, is employed to derive long-run import price and income elasticity estimates. Results reveal that both price and income variables do affect import demand significantly, and more interestingly, contrary to previous findings, play an important role in explaining Japanese import demand, at least over the long run. This finding is quite intuitive in that, although nonmarket forces did play a role in destablilizing Japanese import demand, this was most likely a short-run phenomena. Over the long term, however, such theoretically postulated economic influences outweighed short-run disturbances in achieving an equilibrium relationship. Finally, the innovative analytical techniques used in this study have a far-reaching potential for use in future applied research in a variety of fields.