Testing for Long-Run Relation between Economic Growth and Export Earnings of Cocoa in Ghana using Co-Integration Techniques
Keywords:Cointegration, VECM, Johansen, Economic Growth, Export
In this study, we explore the causal influence of export earnings of cocoa towards economic growth (i.e., gross domestic product (GDP)). The augmented Dickeyâ€“Fuller (ADF) and the Phillipsâ€“Perron (PP) unit root tests indicate that the two series are integrated of order one, I (1). The results of the trace and the maxi-eigenvalue cointegration test based on Johansenâ€™s procedure indicate the existence of a cointegration between export earnings of cocoa and GDP. Thus, the two variables of the study have a long-run equilibrium relationship. The vector error correction model of order two, VECM (2), was considered as the â€œbestâ€ model after evaluating other competing models. It is observed that, in the long-run, previous year export earnings of cocoa is positively related to economic growth. In the short run, the results revealed that the previous GDP has positive effect on current GDP; and higher export earnings of cocoa have positive effect on GDP. Feedback causality is observed between economic growth (GDP) and export earnings of cocoa. This suggests a bi-directional causality from export earnings to economic growth (GDP).
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