Error Correction Models and Real Convergence – Case of Slovakia

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Error Correction Models and Real Convergence – Case of Slovakia Powered By Docstoc
					Nominal and Real Convergence
of Slovak Republic and Poland to Eurozone


Rudolf Gavliak, Vladimír Úradníček, Emília Zimková




The 5th Chorzow Conference of Banking and Finance
Knowledge and Funds Transfer into the Sectors of the EU Economy
September 26 – 27, 2008
Content

1.   Introduction
2.   Methodology and Data
3.   Outcome of Analyses
4.   Conclusion
Introduction

Classification of the Convergence




                      Structural
  Nominal Convergence (1)

               Price       Public Finance               Exchange Rate      Interest
               stability                                                   rates
               HICP        Def/HDP Debt/HDP
                                                                           10 y
Czech   2006      2,1        -2,7           29,4          No        4,8       3,8
Rep.    2007      3,0        -1,6           28,7          No        2,0       4,3
        2008      4,4        -1,4           28,1          No        8,4       4,5
Hungary 2006      4,0        -9,2           65,5          No        -6,5      7,1
        2007      7,9        -5,5           66,0          No        4,9       6,7
        2008      7,5        -4,0           66,5          No        -2,7      6,9
                                                   Source: Convergence Report 2008
Nominal Convergence (2)

              Price       Public Finance             Exchange Rate      Interest
              stability                                                 rates
              HICP        Def/HDP Debt/HDP ERM II Apprec
                                                  /Deprec 10 y
Poland 2006      1,3        -3,8           47,6        No        3,2       5,2
       2007      2,6        -2,0           45,2        No        2,9       5,5
       2008      3,2        -2,5           44,5        No        6,3       5,7
Slovak 2006      4,3        -3,6           30,4        No        3,5       4,4
Rep.   2007      1,9        -2,2           29,4        No        9,3       4,5
       2008      2,2        -2,7           35,5        No        2,5       4,5
                                                  Source: Convergence Report 2008
Structural Convergence

1. The structural convergence is analysing convergence
   of the economy according its sectors, employment,
   inovations, research, economic reforms, social and
   enviromental policies...

2.   It is also analysing the harmonisation of the economic
     cycles and the synchronisation of economics shocks
     (Gavliak, Úradníček, Zimková, 2007, SVAR
     technique, the Blanchard-Quah teoretical approach).
Real Convergence

1. The real convegence can be measured by economic
   performance, the level of labour productivity, the level of
   prices and wages (Barančok, 2007)

2. Commonly used indicator to meassure the economic
   convergence is the gross domestic product in the
   purchasing power parity (HDPPPP).
Methodology

„Real economic convergence“ can be estimated by


       β convergence
       σ convergence
       Cointegration and Error Correction
        Models
Methodology - β convergence


      β convergence is a concept which is estimating the
   speed of convergence of the individual country to the
   average of clusstered countries.

    When the partial correlation between growth in
   income over time and its initial level is negative, there
   is β convergence.
Methodology - σ convergence


   When the dispersion of real per capita income across
   a group of economies falls over time, there is
   σ convergence.
Methodology – Cointegration and ECM
    Long lasting mutual trend of analysed indicators is
   searched by cointegration.

    In a short term there might be some deviations
   which are studied by error correction models (ECM).

    The output is twofold: we analyze the long-lasting
   equilibrium of the real economy and secondly we
   estimate the duration whithin which the searched
   variables are returning to the long-lasting equilibrium
   in the case of the short-term deviations.
Methodology – Cointegration and ECM


   The cointegrating equations may have intercepts and
  deterministic trends

   We provided tests for the following five possibilities
  considered by Johansen
Johansen tests
      1. Series y have no deterministic trends and the
      cointegrating equations do not have intercepts


        H 2  r  : Πyt 1  Bxt    yt 1.

      2. Series y have no deterministic trends and the
     cointegrating equations have intercepts


       H1*  r  : Πyt 1  Bxt      yt 1  0  .
Johansen tests
  3. Series y have linear trends but the cointegrating
  equations have only intercepts:


   H1  r  : Πyt 1  Bxt      yt 1  0     0 .
  4. Both series y and the cointegrating equations have
  linear trends:


   H *  r  : Πyt 1  Bxt      yt 1  0  1t     0 .
Johansen tests
  5. Series y have quadratic trends and the cointegrating
  equations have linear trends:

  H  r  : Πyt 1  Bxt      yt 1  0  1t      0   1t  .


  where  is the (non-unique) k x (k - r) matrix such
            
  that    0 and rank      k .
                             
Data and Software

    For analyses were used quarterly input data from
   Eurostat datasource

    We analysed detrended data from first quarter 2000
   till the fist quarter 2008

    EViews 4 software
Empirical Results
of Cointegration analyses – case of Slovakia
   The cointegration equation, which is characterising the
   long-lasting equilibrium, has the following
   specification:

                  g SK = 3,87 g EA,
    where
g SK – y-on-y growth of the Gross Domestic Product in
    Slovakia (in %),
g EA – y-on-y growth of the Gross Domestic Product in
    Euroarea (in %).
Empirical Results
of Cointegration analyses – case of Slovakia
   Error Correction Coefficients estimated in the Error
   Correction Model



   D(RASTHDP_SR)             -0.164680 (0.05673)

   D(RASTHDP_EA12)           0.099963 (0.05393)
Empirical Results
of Cointegration analyses – case of Poland
   The cointegration equation, which is characterising the
   long-lasting equilibrium, has the following
   specification:
                 g PL = 1,72 g EA,

    where
g PL – y-on-y growth of the Gross Domestic Product in
    Poland (in %),
g EA – y-on-y growth of the Gross Domestic Product in
    Euroarea (in %).
Empirical Results
of Cointegration analyses – case of Poland
   Error Correction Coefficients estimated in the Error
   Correction Model



   D(RASTHDP_PL)             -0.1488 (0.06414)

   D(RASTHDP_EA12)           0.132470 (0.06315)
Conclusion

  The results of cointegration analyses proved solid the
  real convergence of the Slovak Republic and Poland to
  Euroarea.

  The entry of both countries to the EMU might be a new
  incentive to the dynamic economic development.

  To speed up this proces the implementation of the
  responsible economic, fiscal and labour market policies,
  the introduction a new structure of the economy based on
  the new technologies are requested.

				
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posted:12/7/2012
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