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Threshold cointegration and granger causality between CPI and PPI in selected countries
Author(s)
Date Issued
2024
Publisher
Institute for Promoting Research and Policy Development
ISSN
2694-1449
2694-1430
Citation
International Journal of Business & Management Studies, 2024, vol. 5(9), pp. 28-37.
Type
Peer Reviewed Journal Article
Abstract
This paper mainly investigates the threshold cointegration and Granger-causality relationships between the CPI and PPI series in the selected countries for policymakers to effectively control inflation. We first applied the unit root test to ensure the integration order of all the series, and then both the linear Engle-Granger (E-G) and the nonlinear Enders-Siklos (E-S) cointegration tests for comparative analysis. Lastly, Granger causality tests are adopted in the momentum threshold vector error correction model (M-TVECM), which is used to estimate the different speeds of adjustment and explore the causal relationship between CPI and PPI in the selected countries. While the E-G test cannot detect cointegration in almost all countries, the E-S test with higher power when there is asymmetric adjustment, supports the cointegration relationship in Canada, Denmark, Indonesia, Japan, Pakistan, Spain, and Uruguay. The evidence also supports the existence of asymmetric threshold adjustment in all cointegrated systems. In addition, the empirical results indicate that Granger causality in the M-TVECM can be classified into two categories. One kind is about CPI leading to PPI, including Spain only while another kind is about bidirectional causality between CPI and PPI for other countries in the M-TVECM.
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