Determinants of Leather Export From Ethiopia: Application of Vector Error Correction Model
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Date
2018-06-03
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Addis Ababa University
Abstract
Determinants of leather export from Ethiopia. Application of vector error correction model.
Getnet Mamo Addis Ababa, 2018
Leather manufacturing is one of the oldest industry globally and particularly in Ethiopia which has remained and sprung forward as an economically important sector in terms of engaging citizens intensively and in export business. The study is aimed to use a multivariate time series model which explains the determinants of leather export from Ethiopia using vector auto-regression (VAR) and vector error correction (VEC) model. The data used are quarterly observations from September 2000 to august 2016. The variables are value of leather export, export price of leather, consumer price index (endogenous variables) And nominal exchange rate (exogenous variables).
The series are seasonally adjusted after they were known to be seasonal through standard tests built in X-12 ARIMA program in E-Views 6 statistical software. Post seasonal adjustment tests also assured that all series are non-seasonal. Unit root tests of the series under study reveal that all the series are non-stationary at level and stationary after first difference. The result of Johansen test indicates the existence of two co-integration relation between the variables and there is long-term dynamics between value of leather export, nominal exchange rate, export price and consumer price index. The three information criteria AIC, SIC and HQ recommended one lag length. Johnsen co-integration test indicated two long term equilibrium relationship occurred between variables. This immediately implied the legitimacy of vector error correction model (VEC) model of order one to be fitted than a pure VAR (1) model for time series data. The final result shows that a Vector Error Correction (VEC) model of lag one with two co-integration equations best fits the data. Export price of leather has a negative effect on value of leather exports. A one percent increase in a unit price of leather export will cause 5.82219 percent decrease in value of leather export in the long run. In the short run Exchange Rate has a negative effect on exports of leather as expected.
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Keywords
Co-Integration, Consumer Price Index (CPI), Nominal Exchange Rate (NER), Value Of Leather Export (VLE), Vector Auto-Regression (VAR), Vector Error Correction Model (VECM)