Testing for Long-Run Relation between Economic Growth and Export Earnings of Cocoa in Ghana using Co-Integration Techniques

Abstract

In this study, we explore the causal influence of export earnings of cocoa towards economic growth (i.e., gross domestic product (GDP)). The augmented Dickey–Fuller (ADF) and the Phillips–Perron (PP) unit root tests indicate that the two series are integrated of order one, I (1). The results of the trace and the maxi-eigenvalue cointegration test based on Johansen’s procedure indicate the existence of a cointegration between export earnings of cocoa and GDP. Thus, the two variables of the study have a long-run equilibrium relationship. The vector error correction model of order two, VECM (2), was considered as the “best” model after evaluating other competing models. It is observed that, in the long-run, previous year export earnings of cocoa is positively related to economic growth. In the short run, the results revealed that the previous GDP has positive effect on current GDP; and higher export earnings of cocoa have positive effect on GDP. Feedback causality is observed between economic growth (GDP) and export earnings of cocoa. This suggests a bi-directional causality from export earnings to economic growth (GDP).

Keywords: Cointegration, VECM, Johansen, ADF, Causality.