Relationships between different Macroeconomic Variables using VECM

TL;DR

This paper investigates the long-term and short-term relationships among key U.S. macroeconomic indicators using VECM, highlighting how changes in one variable can influence others, with implications for policy-making.

Contribution

It applies VECM to analyze cointegration and error correction among U.S. macroeconomic variables, extending prior econometric research in this area.

Findings

Identification of cointegrating relationships among variables

Evidence of error correction behavior in macroeconomic indicators

Insights into spillover effects for policy implications

Abstract

Through this paper, an attempt has been made to quantify the underlying relationships between the leading macroeconomic indicators. More clearly, an effort has been made in this paper to assess the cointegrating relationships and examine the error correction behavior revealed by macroeconomic variables using econometric techniques that were initially developed by Engle and Granger (1987), and further explored by various succeeding papers, with the latest being Tu and Yi (2017). Gross Domestic Product, Discount Rate, Consumer Price Index and population of U.S are representatives of the economy that have been used in this study to analyze the relationships between economic indicators and understand how an adverse change in one of these variables might have ramifications on the others. This is performed to corroborate and guide the belief that a policy maker with specified intentions cannot ignore the spillover effects caused by implementation of a certain policy.