Export instability, income terms of trade instability and growth: causal analyses

Abstract

This paper seeks to examine the causal relationship between export instability. income terms of trade instability, investment and economic growth by using the cointegration analysis and the multivariate error correction model. In addition, reverse causality is also tested by examining whether output and investment cause export instability and income terms of trade instability. The data utilized are drawn from a sample of 14 developing nations. The cointegration results indicate that export and income terms of trade instability have long-run relationships with output. For most countries, instability in the income terms of trade is negatively related to output while the results for export instability are mixed. With respect to causality, it seems that export instability and income terms of trade instability play a causal role in the development process via a variety of avenues.

Keywords:

• Export instability
• income terms of trade
• economic development
• vector error correction model
• cointegration