International Journal of Econometrics and Financial Management
ISSN (Print): 2374-2011 ISSN (Online): 2374-2038 Website: http://www.sciepub.com/journal/ijefm Editor-in-chief: Tarek Sadraoui
Open Access
Journal Browser
Go
International Journal of Econometrics and Financial Management. 2014, 2(6), 214-219
DOI: 10.12691/ijefm-2-6-1
Open AccessArticle

Estimation of Short and Long Run Equilibrium Coefficients in Error Correction Model: An Empirical Evidence from Nepal

Kamal Raj Dhungel1,

1Central Department of Economics, Tribhuvan Univercity, Kathmandu, Nepal

Pub. Date: October 19, 2014

Cite this paper:
Kamal Raj Dhungel. Estimation of Short and Long Run Equilibrium Coefficients in Error Correction Model: An Empirical Evidence from Nepal. International Journal of Econometrics and Financial Management. 2014; 2(6):214-219. doi: 10.12691/ijefm-2-6-1

Abstract

This study aims to investigate the short and long run equilibrium between the electricity consumption and foreign aid of Nepalese economy during 1974-2012. Unit root test, co-integration test and finally error correction model are the econometric tools to establish the relationship between electricity consumption and foreign aid. In addition to this ordinary least square method is used to find out the foreign aid elasticity and spurious regression. The findings reveal that the variables are non-stationary at their level and they become stationary in their first difference. There are two co-integration equations showing the long run relationship between electricity consumption and foreign aid. There is short and long run equilibrium as indicated by the statistically significant coefficient of foreign aid and error correction term. The long run elasticity coefficient reveals that the 1% change in foreign aid will change the electricity consumption by 0.46%. The results of ECM indicate that there is both short and long run equilibrium in the system. The coefficient of one period lag residual is negative and significant which represent the long run equilibrium. The coefficient is -0.336 meaning that system corrects its previous period disequilibrium at a speed of 33.6% annually to reach at the steady state.

Keywords:
electricity consumption foreign aid co-integration short run long run error correction

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]  Aqeel, A. and M.S. Butt, 2001, “The relationship between energy consumption and economic growth in Pakistan”, Asia Pacific Development Journal 8(2) pp. 101-110.
 
[2]  Boef, S. De, 2000, “Modeling equilibrium relationships: Error correction model with strongly autoregressive data”, Pensilvania University, Department of Political Science, pp. 78-94
 
[3]  Dhungel, K.R., 2008, “A causal relationship between energy consumption and economic growth in Nepal”, Asia-Pacific Development Journal, 15(1) PP. 137-150.
 
[4]  Dhungel, K.R., 2009, ‘Does economic growth in Nepal cause electricity consumption’ Hydro Nepal Issue 5, pp. 47-51
 
[5]  Dhungel, K.R., 2014a, “Does Remittance in Nepal Cause Gross Domestic Product? An Empirical Evidence Using Vector Error Correction Model.” International Journal of Econometrics and Financial Management 2(5), pp. 168-174.
 
[6]  Dhungel, K.R., 2014b, “Short and Long Run Equilibrium between Electricity Consumption and Foreign Aid”, Review of Contemporary Business Research 3(2), pp. 105-115
 
[7]  Dhungel K.R., 2014c, “On the relationship between electricity consumption and selected macroeconomic variables: empirical evidence from Nepal” Modern Economy, 5(4), pp. 360-366。
 
[8]  Dickey, D. A., and Fuller W. A., 1979, “Distribution of the Estimators for Autoregressive Time Series with a Unit Root”, Journal of the American Statistical Association 74, pp. 427-431
 
[9]  Engle R. and Granger C.,1987, “Co-integration and error correction; representation, estimation and testing”, Econometrica, 55, pp-251-276
 
[10]  Johansen, Soren, 1988, “Statistical analysis of cointegration vectors,” Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pp. 231-254.
 
[11]  Mozumder, P. and A. Marathe, “Causality relationship between electricity & GDP in Bangladesh”, Energy Policy (www.unm.edu).
 
[12]  Mashih, A.M.M. and R. Mashih, 1996, “Energy consumption real income and temporary causality results from multicountry study based on co-integration and error correction modeling techniques, Energy Economics 18, pp. 165-83.
 
[13]  Sachs, J., 2008, “Common Wealth, Economics of Crowded Planet”, Penguin Books.
 
[14]  Zaman K., Muhammad M. Khan, Mehboob Ahmad, RabiahRustam, 2012, “Determinants of electricity consumption function in Pakistan: Old wine in a new bottle”, Energy Policy Vol.50, pp. 623-34.