Working Paper Series: Special Edition of 2016 to 2018 Interns

in ta . The results prompt further investigation, the study would need to assess the short-run causal relationship between the variables with the use of the VECM in the following section. In both versions of equation 2, fdi has been found to have a long-run relationship with economic growth. 5.3 Long-run Estimation with DOLS Test results reported in Table 4 (see appendix) show that there are at most four cointegrating relationships. The finding is consistent with theory which suggests that there can be up to n-1 (n = number of variables) cointegrating relationships. To the extent that cointegration has been found, it indicates that the Granger representation theorem holds. The theory posits that in the presence of cointegrated variables, “Granger causality exists in at least one direction”, Mamingi (2005, p. 201). Most importantly, there will be a valid error correction model, that is, a VAR that is restricted with the presence of a lagged error correction term as the restriction term. The bottom line of the cointegration result is that the long-run relationship between the variables can be exploited by member governments of the ECCU to spur economic activity. 5.4 VECM results Results from the panel vector error correction model validated both the cointegration and DOLS analysis conceding that there is a unidirectional long-run equilibrium relationship running from fdi , to, ta and the control variables to economic growth in the ECCU. The significant and negative cointegration coefficient (0.0032, -0.059223) indicates that fdi and to converge to their long-run equilibrium at a rate of 6.0 per cent annually. In the case of ta , it converges at rate of 5.6 per cent (0.0013, -0.055779) annually. For economies that are substantially open and depend mainly on open market strategies for economic activity, these convergence rates appear to be low. The results further imply that it would take roughly 17 years for equilibrium to take place between fdi , to and economic growth to reach their long-run equilibrium while fdi and ta would take approximately 18 years. The Wald coefficient test for short-run dynamics shows that fdi has a short-run relationship with economic activity in both versions of equation 2. Moreover, a 1 per cent increase in fdi leads 9.5 (ran with to) and a 10 (ran with ta) percentage point increase in economic growth in the short-run.

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