Stationarity and Cointegration Analysis Reveals Long-Run Relationships in Trinidad and Tobago Economy

Introduction

A recent study has shed light on the stationarity and cointegration properties of key economic variables in Trinidad and Tobago. The analysis, conducted using the Augmented Dickey-Fuller (ADF) test and Johansen procedure, revealed that certain variables exhibit non-stationarity, while others display long-run relationships.

Stationarity Analysis

The ADF test was used to determine the order of integration for each variable. The results showed that:

• Three out of six variables - Gross Fixed Capital Formation (GFCF), Narcotics Offences, and Inflation - were found to be integrated of order one (I(1)), meaning they have a unit root.
• Real GDP and Fraud Offences were identified as I(2) variables, indicating that they are integrated of order two.

Cointegration Analysis

The Johansen procedure was used to test for cointegration among the six variables. The results showed:

• There is only one cointegrating equation at the 5% level of significance, indicating a long-run relationship between Real GDP, GFCF, Fraud Offences, Narcotics Offences, and Inflation.
• The cointegrating equation represents this long-run relationship:

lnrgdp = 0.431523lngfcf + 0.067631lnfrd - 0.329627l nnar + 0.11643

Methodology

The study employed the following methodology:

• The Augmented Dickey-Fuller (ADF) test was used to determine the order of integration for each variable.
  • Three different models were tested:
    • Level model with intercept and trend
    • First-difference model with intercept and trend
    • Second-difference model with intercept and trend
• The Johansen procedure was used to test for cointegration among the six variables.
  • Two tests were conducted: the trace test and the maximal eigenvalue test.
  • The null hypothesis of both tests is that there are no cointegrating equations (r = 0), while the alternative hypothesis is that there is at least one cointegrating equation (r ≥ 1).

Conclusion

The results of this study provide valuable insights into the stationarity and cointegration properties of key economic variables in Trinidad and Tobago. The findings suggest that certain variables exhibit non-stationarity, while others display long-run relationships. By understanding these relationships, policymakers can better design effective policies to promote sustainable economic growth and development in the country.

Implications

The study’s findings have important implications for economic policy-making in Trinidad and Tobago. By understanding the long-run relationships between these key economic variables, policymakers can:

• Design effective policies to promote sustainable economic growth and development in the country.
• Identify areas where policy interventions may be needed to address non-stationarity and cointegration issues.