Analysis of the Dynamic Relationship Between Consumption Expenditure and Economic Growth in Somalia: Co-integration and Vector Error Correction Modelling

Abstract

In this study, it has been reviewed the recent empirical studies to provide fresh evidence of the causal and dynamic relationship between the consumption expenditure and economic growth in Somalia. The study covers the sample period of 1970-2018. After determining that both series were integrated of order (1), Engle-Granger two stage co-integration test and vector error correction model has been employed. The findings of the study revealed that, consumption expenditure and economic growth have both long run and short run relationship. The error correction model performs well, as it has been negative and statically significant, signifying that each year adjustments towards the convergence is ascertained. However, the vecm based Granger causality test indicated that there’s a unidirectional short run relationship running from consumption expenditure to economic growth.

Keywords: Consumption expenditure, Unit root test, co-integration, Vector error correction, GDP, Granger causality, Error correction model.

DOI: 10.7176/JESD/10-14-05

Publication date:July 31^st 2020