An Estimation of long-run Export Demand Function for Papua New Guinea by employing the Multivariate Cointegration and Vector Error Correction Models

Abstract

For the sample period annual data between 1977 to 2020 ,for Papua new Guinea , there is a long-run relationship ( cointegration) between the exports , the real GDP , the PGK/USD exchange rate , the variability of the exchange rate , the consumer prices , the imports , and the money supply .Most of the aforesaid relationships or the signs of the coefficients of the variables in the cointegrating vector , after transformation into equation form are as expected from the theory .For example , the depreciation of the exchange rate of PGK /USD increases the exports ; but the increase in the variability of the PGK/USD rate decreases the exports by discouraging the exporters from the heightened uncertainty as the exporters are risk averse . The increase in the consumer prices and money supply decreases the exports. The increase in GDP has of course a positive favourable effect on the exports. Granger -causality using the Error-correction model has established that the change in natural log of the exports from Papua New Guinea are Granger-caused by the past level or the past trend of other variables in the system, namely the money supply, kina-dollar exchange rates depreciation, and the real GDP., the consumer prices and the variability of the exchange rate.