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This research investigates the effect of exchange rate pass-through on domestic prices and import prices in Viet Nam basing on data from 2000 to 2010. This study applied to a Vector error correction model (VECM), suggested by Johansen (1990). Using Impulse response function and variance decomposition to estimate exchange rate pass-through to domestic prices and import prices. The major findings of this paper are: 1) the effect of exchange rate shock on CPI and import prices are significant in the long run; 2) in the short run, when exchange rate changes, its impacts will move to CPI after 2-3 quarters, as well as, the impact of exchange rate shock to import price has existed in Viet Nam.
NATIONAL ECONOMICS UNIVERSITY ERASMUS UNIVERSITY ROTTERDAM INSTITUTE OF PUBLIC POLICY AND MANAGEMENT INTERNATIONAL INSTITUTE OF SOCIAL STUDIES VIETNAM-NETHERLANDS MASTER’S PROGRAM IN DEVELOPMENT ECONOMICS (MDE) THESIS A STUDY OF EXCHANGE RATE PASS-THROUGH IN VIETNAM DURING PERIOD 2000-2010 Supervisor Student : Dr Nguyen Phi Lan : NGO THI HIEN, MDE 18 A thesis submitted for the Master Degree in Development Economics at the Institute of Public Policy and Management (IPPM) of National Economics University, Vietnam Hanoi - 2015 ACKNOWLEDGEMENTS Firstly, I sincerely thank Dr Nguyen Phi Lan, my thesis advisor, for guiding and helping me complete this thesis My thanks also go out to all lecturers of The Vietnam – Netherlands Master’s Program in Development Economics for all the knowledge, devotion and hard work I am very thankful to have my family’s and my friends’ constant support throughout my life and particularly during this program Finally, I dedicate this thesis to my father and my beloved children Hanoi, thang ……nam …… Tác giả Ngo Thi Hien ABSTRACTS This research investigates the effect of exchange rate pass-through on domestic prices and import prices in Viet Nam basing on data from 2000 to 2010 This study applied to a Vector error correction model (VECM), suggested by Johansen (1990) Using Impulse response function and variance decomposition to estimate exchange rate pass-through to domestic prices and import prices The major findings of this paper are: 1) the effect of exchange rate shock on CPI and import prices are significant in the long run; 2) in the short run, when exchange rate changes, its impacts will move to CPI after 2-3 quarters, as well as, the impact of exchange rate shock to import price has existed in Viet Nam TABLE OF CONTENTS CHAPTER INTRODUCTION .1 1.1.Problem statement 1.3.Research methods and data 1.4.Scope and limitations .2 1.5.Expected outcomes of the thesis 1.6.Structure of the thesis .3 CHAPTER LITERATURE REVIEW .4 2.1.Theoretical background 2.2.Empirical study review CHAPTER 10 OVERVIEW ABOUT REGIMES OF EXCHANGE RATE IN VIET NAM .10 3.1.Legal frameworks 10 3.2 Exchange rate management policies 10 CHAPTER 20 EMPIRICAL STUDY .20 4.2 Unit root and cointegration tests 22 4.3Estimated results 30 4.5 Variance Decomposition analysis 36 Results of Variance decomposition, which show the contribution of innovation in the exchange rate to the variability of both CPI and Import Prices, are presented in Table 4.9 36 POLICY RECOMMENDATIONS AND CONCLUDING REMARKS .38 APPENDIX THE RESERVE OF FOREIGN CURRENCY OF VIET NAM 42 APPENDIX VAR LAG ORDER CRITERIA 42 42 APPENDIX VEC RESIDUAL SERIAL CORRELATION LM TEST .43 LIST OF ABBREVIATIONS VAR VECM ER IMF IFS GDP ERPT M2 CPI BIDV BFTV SBV WTO CPI USD VND Vector Autoregressive model Vector Error Correction Model Exchange rate International Monetary Fund International Financial Statistics Gross Domestic Product Exchange rate Pass-Through Money supply International Monetary Fund Bank for Investment and Development of Viet Nam Joint stock commercial Bank for Foreign Trade of Viet Nam State Bank of Viet Nam World Trade Organization Consumer Price Index of Viet Nam United States Dollar Vietnamese Dong LIST OF FIGURES CHAPTER INTRODUCTION .1 1.1.Problem statement 1.3.Research methods and data 1.4.Scope and limitations .2 1.5.Expected outcomes of the thesis 1.6.Structure of the thesis .3 CHAPTER LITERATURE REVIEW .4 2.1.Theoretical background 2.2.Empirical study review CHAPTER 10 OVERVIEW ABOUT REGIMES OF EXCHANGE RATE IN VIET NAM .10 3.1.Legal frameworks 10 3.2 Exchange rate management policies 10 CHAPTER 20 EMPIRICAL STUDY .20 4.2 Unit root and cointegration tests 22 4.3Estimated results 30 4.5 Variance Decomposition analysis 36 Results of Variance decomposition, which show the contribution of innovation in the exchange rate to the variability of both CPI and Import Prices, are presented in Table 4.9 36 POLICY RECOMMENDATIONS AND CONCLUDING REMARKS .38 APPENDIX THE RESERVE OF FOREIGN CURRENCY OF VIET NAM 42 APPENDIX VAR LAG ORDER CRITERIA 42 42 APPENDIX VEC RESIDUAL SERIAL CORRELATION LM TEST .43 LIST OF TABLES Table 1: Table : Table 3: Table 4: Table Table Table Table Table 4.9 Variables definition and data sources Error: Reference source not found ADF Unit Root Test Results .Error: Reference source not found Johansen Maximum Likelihood Co-integration.Error: Reference source not found Johansen Maximum Likelihood Co-integration Error: Reference source not found Results of estimation ERPT into CPI in the long run Error: Reference source not found Results of estimation ERPT into CPI in the short run Error: Reference source not found Results of estimation ERPT into Import Prices in the long run Error: Reference source not found Results of estimation ERPT into Import Prices in the short run Error: Reference source not found Variance decomposition of CPI and Import Prices .Error: Reference source not found CHAPTER INTRODUCTION 1.1 Problem statement Prices of consumer goods have many problems that interest many economists Prices of consumer goods are affected by many factors such as GDP, import price of goods, money supply, exchange rate, trade policy, psychological factors or behavior of consumers There are many studies investigating the effects of factors on prices of consumer goods in the world In facts, the main factors affecting domestic prices are the weakness of manufacturing and agriculture, rapid population growth, the shocks of energy prices, fluctuation of exchange rate and monetary policies These factors have been existed in the Vietnam’s economy and been studied broadly However, one of the important factors that have been rarely researched is the ERPT and its impacts on the import prices Therefore, it is necessary to study the effects of ERPT on import price and CPI in Viet Nam In this research, the author will investigate the impacts of exchange rate pass-through in Viet Nam to domestic prices in order to show “how domestic prices will change when exchange rate changes by one percent” and “how PTE will play the leading role in estimating its impacts on domestic prices” 1.2 The objectives of the thesis 1.2.1 Objectives Fredric S Mishkin (2010) showed that exchange rate plays an important role in an open economy Adjustments of exchange rate will affect the inflation and domestic prices Studies about how the exchange rate impacts domestic price in other economies give us other results In developed countries, this effect is less substantial than it is in developing countries because the developing countries with open economies will be affected more significantly by external shocks The fluctuation of exchange rate, therefore, surely influences local prices in developing countries (Pavlo B., 2010) In Viet Nam, there are not many studies about this factor and their results are not satisfactory (e.g Vo Van Minh, 2009; Tran Mai Anh and Nguyen Dinh Minh Anh, 2010) Nhat Trung and Nguyen Hong Nga (2012) showed that Viet Nam, as a developing country with an open economy, theoretically should have a substantial effect of exchange rate on domestic prices However, it contradicts with the previous studies which conclude the opposite Hence, the objectives of this thesis are 1) to examine to see whether the theory is correct with Viet Nam case, and 2) to investigate exchange rate’s impacts in the short and long run 1.2.2 Research questions (1) How did exchange rate pass-through in Viet Nam affect domestic prices? (2) How did exchange rate pass-through in Viet Nam affect import prices? 1.3 Research methods and data 1.3.1 Methodology The vector autoregressive (VAR) model is a general framework used to describe the dynamic interrelationship among stationary variables Recently, economic researchers usually use VAR to investigate time series For VAR model, the variables are dependent and they are series Firstly, I will test the stationary variables using Augmented Dickey-Fuller test (ADF) and choosing length of lags When variable is stationary at the length of lag, we join variable into model Some standards are commonly used: Akaike information criterion (AIC) Hannan-Quinn criterion (HQC) Schwarz criterion (SIC) In fact, VECM is just a special case of the VAR for variables that are stationary in their differences It can take into account any co-integration relationships among the variables The VECM can give the long run relationships and the short run relationships of non-stationary variables and VECM can be applied with many different types of time series variables and dates (Phan Thi Hong Thao, 2012) 1.3.2 Data source The research will use monthly dataset in the period 2000-2010, which is collected from General Statistic Office (GSO), International Monetary Fund (IMF), Asia Development Bank (ADB) with VECM methodology and the model to measure ERPT effect in CPI and import price, in both the short and long run 1.4 Scope and limitations By the year of 1986, Viet Nam started with “Doi Moi” policy, which made the definition of exchange rate became more popular In recent years, the influence of exchange rate’s fluctuation on traded goods and non-traded goods have increased Moreover, in an open economy, these influences could be profoundly vulnerable to external shocks With the limitations of data sources, statistic errors and limitations of time, this thesis covers ERPT in Viet Nam that affects CPI and import price, in the short and long run only 1.5 Expected outcomes of the thesis Over the last three decades, transmission mechanisms of the pass-through exchange rate to local prices have been emerged as a subject for academic research for various countries, industries, products Those studies from Knetter (1989), Campa and Goldberg (2002), Goldberg and Knetter(1997), Licui, Chang Shu and Jian Chang (2009) mainly focus on cases of developed countries such as the United States, European area, Japan, and other OECD countries Only a few studies investigate ERPT of developing countries such as Nusrate Aziz (2009), Takagi and Yoshida (2001) or Parsons and Sato (2006) In Viet Nam, there are a few empirical studies such as Nguyen Cam Nhung (2010), Vo Van Minh (2009) and Tran Mai Anh- Nguyen Dinh Minh Anh (2010) However, as mentioned above, the results collected from estimating equations are different Usually, the ERPT’s impact in developed countries is lower than that in developing countries (suggested by Nhat Trung and Nguyen Hong Nga (2012) In Viet Nam, some previous studies show that the effect of ERPT on CPI is small (Vo Van Minh 2009; and Tran Mai Anh- Nguyen Dinh Minh Anh 2010) It seems illogical for a developing country like Viet Nam 1.6 Structure of the thesis The structure of the thesis is as follows: Chapter 1: Introduction Chapter 2: Literature review This chapter will provide theoretical background and review some studies about exchange rate pass-through in Viet Nam and other countries with empirical findings Chapter 3: Overview about regimes of exchange rate in Viet Nam This chapter will present about exchange rate regimes in Viet Nam from before 1989 to present Besides, this chapter discusses about the import, export, CPI, money supply and GDP of Viet Nam upon each exchange rate regimes Chapter 4: Empirical study This chapter explains the data, methodology and the model Also, this chapter provides empirical results and analysis Chapter 5: Policy recommendations and concluding remarks This chapter summarizes the main findings of the thesis and give policy recommendations based on what the thesis found Table 3: Johansen Maximum Likelihood Co-integration Test Results for Model Hypothesized No of CE(s) None * At most At most At most At most Eigenvalue Trace Statistic 0.05 Critical Value Prob.** 0.937610 0.534446 0.213266 0.074038 0.028208 155.3709 44.39706 13.81601 4.221413 1.144520 69.81889 47.85613 29.79707 15.49471 3.841466 0.0000 0.1019 0.8508 0.8849 0.2847 Trace test indicates cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Table 4.4 indicates that the hypothesis of no co-integration among the variables in Model can be rejected The max-Eigen value reveals three co-integrating equations in the analysis (see Table 4.4) A VEC model is estimated taken cointegration among the variables into account Table 4: Johansen Maximum Likelihood Co-integration Test Results for Model Unrestricted Cointegration Rank Test (Trace) Hypothesized No of CE(s) None * At most * At most * At most At most Eigenvalue Trace Statistic 0.05 Critical Value Prob.** 0.898441 0.645532 0.427939 0.160830 0.039274 163.9266 72.44218 30.95675 8.616329 1.602656 69.81889 47.85613 29.79707 15.49471 3.841466 0.0000 0.0001 0.0366 0.4021 0.2055 Trace test indicates cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values 4.3 Estimated results After using VECM estimation to analyze the exchange rate pass-through to domestic prices and import prices, the estimated results are shown as follows: Model 1: 30 The long run model: Table Results of estimation ERPT into CPI in the long run LOG(P_CPI(-1)) LOG(RGDP(-1)) -1.376779 (0.26692) [ 5.15799] LOG(M2(-1)) 0.515660 (0.07617) [6.76983] LOG(EXR(-1)) 0.702935 (0.17460) [4.02591] (EXPORTS(1)+IMPORTS(-1))/RGDP(- 0.145831 (0.06950) [2.09829] C 6.600336 The results of the model show that the effect of exchange rate shock on CPI is significant in the long run Exchange rate is positive and statistically significant at percent level In addition, the estimated results also show that the open of economy affects CPI substantially The coefficient of OPEN is positive and statistically significant at percent level It could understand that the economy is sensitive with external shocks In addition, coefficient of M2 is positive and statistically significant at percent level Coefficient of GDP is negative It means that when CPI increases, it makes GDP decreasing It can be explained that when CPI rises, enterprises will reduce their outcomes, so economy will not grow 31 The short run model: Table Results of estimation ERPT into CPI in the short run D(LOG(P_CPI)) ECM -0.332445 (0.07945) [-4.18423] D(LOG(P_CPI(-1))) 0.531830 (0.23433) [ 2.26954] D(LOG(RGDP(-1))) 0.270849 (0.07202) [ 3.76061] D((EXPORTS(-1)+IMPORTS(-1))/RGDP(-1)) -0.112989 (0.05186) [-2.17862] C -0.322341 (0.06679) [-4.82585] LOG(WP) 0.066731 (0.01607) [ 4.15295] The estimated results show that when exchange rate changes, its implications will move to CPI after quarters It is a little different from some previous researches about ERPT to CPI in Viet Nam According to the previous researches, the implication is about quarters (6 months) from changes in exchange rate Besides, an increase in the aggregate demand leads to an increase in domestic prices with lags quarter Domestic prices are also relatively sensitive with world prices in the shortterm; the coefficient of WP is positive and statistically significant at percent level Changes of WP affect CPI immediately Reason is big import and dollarization of Vietnam 32 Model 2: The long run model Table Results of estimation ERPT into Import Prices in the long run Cointegrating Eq: CointEq1 CointEq2 CointEq3 LOG(P_IMP(-1)) 1.000000 0.000000 0.000000 LOG(RGDP(-1)) 0.000000 1.000000 0.000000 LOG(M2(-1)) 0.000000 0.000000 1.000000 LOG(EXR(-1)) 0.185100 (1.00015) [ 0.18507] -0.099305 (0.96666) [-0.10273] 1.610286 (3.31037) [ 0.48644] 1))/RGDP(-1) -0.203031 (0.32836) [-0.61832] -0.377216 (0.31737) [-1.18859] -1.862309 (1.08683) [-1.71353] C -6.919126 -10.00084 -26.39746 (EXPORTS(-1)+IMPORTS(- The results of the model show that, the effect of exchange rate shock on import prices is positive in the long run but it is rarely insignificant It may be clarified by controllability exchange rate regime of government 33 The short run model: Table Results of estimation ERPT into Import Prices in the short run Error Correction: D(LOG(P_IMP)) ECM -1.090010 (0.41082) [-2.65324] D(LOG(P_IMP(-4))) 0.421901 (0.22941) [ 1.83906] D(LOG(RGDP(-2))) 3.199179 (1.85565) [ 1.72402] D(LOG(RGDP(-3))) 3.637576 (1.68941) [ 2.15316] D(LOG(RGDP(-4))) 3.908672 (1.55956) [ 2.50626] D(LOG(EXR(-1))) 12.52853 (6.28571) [ 1.99318] D((EXPORTS(-3)+IMPORTS(3))/RGDP(-3)) 0.591493 (0.18559) [ 3.18715] D((EXPORTS(-4)+IMPORTS(4))/RGDP(-4)) 0.323280 (0.19101) [ 1.69250] C -0.867793 (0.33874) [-2.56185] The estimated results show that in the short run the impact of exchange rate shock to import price has existed in Viet Nam Coefficients of LOG (EXR) are positive and statistically significant at percent level with lags quarter Coefficients of LOG (RGDP) are positive and statistically significant It means that GDP increases 34 leading to import raises The results of estimation of model show that the open of economy has affected PM significantly 4.4 Impulse Response Analysis Next, the analysis of the impulse-response function reveals that, the depreciation shock of exchange rate seems to have a negative effect on domestic prices and import prices Accordingly, a depreciation in domestic currency leads to an increase in both domestic and import prices (see Figure 4.1 and Figure 4.2) Figure : Response of CPI to Exchange Rate shock in Model Response to Cholesky One S.D Innovations Response of LOG(P_CPI) to LOG(RGDP) Response of LOG(P_CPI) to LOG(M2) 016 016 012 012 008 008 004 004 000 000 -.004 -.004 10 10 Response of LOG(P_CPI) to LOG(EXR) Res pons e of LOG( P_CPI) to (EXPORTS+IMPORTS) /RGDP 016 016 012 012 008 008 004 004 000 000 -.004 -.004 10 35 10 Figure 2: Response of IMP to Exchange Rate shock in Model Response to Cholesky One S.D Innovations Response of LOG(P_IMP) to LOG(RGDP) Respons e of LOG(P_IMP) to LOG(M2) 03 03 02 02 01 01 00 00 -.01 -.01 -.02 -.02 10 10 Response of LOG(P_IMP) to LOG(EXR) Res ponse of LOG(P_IMP) to (EXPORTS+IMPORTS)/RGDP 03 03 02 02 01 01 00 00 -.01 -.01 -.02 -.02 10 10 4.5 Variance Decomposition analysis Results of Variance decomposition, which show the contribution of innovation in the exchange rate to the variability of both CPI and Import Prices, are presented in Table 4.9 Table 4.9 Variance decomposition of CPI and Import Prices CPI Period S.E LOG(P_CPI) LOG(RGDP) LOG(M2) LOG(EXR) (EXPORTS+IMPO RTS)/RGDP 10 11 12 0.008413 0.014504 0.019546 0.023734 0.027536 0.031535 0.035112 0.038446 0.042359 0.046002 0.049105 0.052449 100.0000 91.74515 74.05656 65.19875 55.52274 47.30038 44.85394 42.71929 39.63914 38.46812 36.57502 34.85013 0.000000 1.610785 4.508896 5.273038 6.876983 9.342251 10.23658 10.65086 11.07111 11.39694 12.21557 12.61332 0.000000 2.061619 10.81604 19.81838 29.66505 35.42897 35.87338 37.35584 40.38484 41.55042 42.28971 42.73134 0.000000 1.361752 5.297963 5.928952 5.118415 5.353685 5.843552 5.783569 5.929497 6.033049 5.947384 6.233265 0.000000 3.220697 5.320542 3.780876 2.816810 2.574715 3.192558 3.490433 2.975408 2.551471 2.972318 3.571951 Import Prices 36 Period 10 11 12 S.E LOG(P_IMP) LOG(RGDP) LOG(M2) LOG(EXR) (EXPORTS+IMP ORTS)/RGDP 0.028214 0.033810 0.036839 0.038014 0.043754 0.047447 0.049910 0.050525 0.055328 0.059099 0.061041 0.062071 100.0000 76.13480 65.75213 61.75556 67.56096 57.45800 52.29868 51.34171 58.61371 51.86905 48.89817 47.29431 0.000000 6.110332 5.149599 4.837658 3.658764 5.650626 5.218802 5.114201 4.331796 7.597295 7.123766 7.008688 0.000000 0.870122 14.73802 15.04643 11.74730 9.996414 14.21659 14.44936 12.28145 11.15623 14.46539 14.24739 0.000000 6.184623 5.339909 5.042254 6.844227 6.166713 6.391347 6.862177 5.846191 5.124680 5.152063 5.463835 0.000000 10.70012 9.020345 13.31810 10.18876 20.72824 21.87457 22.23255 18.92685 24.25275 24.36061 25.98577 As shown by Table 4.9, after quarters, the exchange rate shock explains 5.92 percent and 5.04 percent of the variance of CPI and Import Prices, respectively, while the remainder of the variance of CPI and Import Prices is explained by innovations in other variables In case of CPI, apart from 65.19 percent of variance explained by its own impact, 19.81 percent of variation is explained by money supply growth Table 4.9 also indicate that after five quarters, 5.11 percent and 6.84 percent of the exchange rate change have already been reflected into consumer prices (CPI) and import prices, respectively It also implies that exchange rate movements have an effect on domestic prices through changes in the cost of production, which emanate from price changes in imported intermediate goods 37 CHAPTER POLICY RECOMMENDATIONS AND CONCLUDING REMARKS 5.1 Major findings In this study, we use VECM model suggested by Johansen (1990) on quarterly data from 2000-2010 The findings of the study are: 1) the effect of exchange rate shock on CPI is significant in the long run Coefficient of real exchange rate and money supply are positive and statistically significant at level percent; 2) when the exchange rate changes, its implications will move to CPI after quarters; 3) the effect of exchange rate shock on import price is significant in the long run; 4) the impact of exchange rate to import price has existed in Vietnam in the short run 5.2 Policy recommendations Based on what the thesis found, author gives some recommendations such as: The results showed sensitive factors of economy of Viet Nam The results also certify that there is signal of ERPT into CPI and import prices Hence, policy makers need to know some things before giving adjustments Such as, when amend local exchange rate, policy makers should give a reasonable figure to avoid big suggestion to import price directly, lead to an increase in CPI Preventing dollarization in economy, economists decided that dollarization in developing economies is a huge problem It make that countries always face to risks of exchange rate fluctuation Besides, in countries which have high level dollarization, if local currency devaluates, it makes debit amount of the state rise, therefore, it brings difficulties for monetary policy makers The analysis results show that fluctuation of ER depend on monetary policy which operating through interest rate tools Other factors outside the economy also impact to the exchange rate fluctuations directly Furthermore, Vietnam’s banking system is sensitive It is heavily affected by external shocks, specially the change of world prices, signs of recession or recovery of world economy This show that Vietnam’s monetary policy is more sensitive It be impacted from external shocks and foreign inflationary It leads to impact of import or CPI strictly The Government need to Control interest rate, stabilize credit growth and hold inflation as well as increases the value of Vietnam dong These help to prevent dollarization and steady the economy Recently, the policy makers have given exchange rate’s policies more flexible which refer to market, but there is still big distance between exchange rate in market and official exchange rate Hence, to find the faith from market, it is required to loosen for exchange rate policies, give flexible change in adjustment of policies 38 To thoroughly consider exchange rate adjustments in terms of rate as well as tolerance margin for the avoidance of negative impacts which possibly increase import price index as well as consumer price index To improve productivity, especially economy's production capacity; to focus on supporting industry development for avoidance of dependence on import of input production factor Above all, economic development model should be tailored for Vietnam's feature in coming years Dollarization regularly causes foreign exchange risk to economy Besides, in economies with high dollarization, local currency devaluation possibly increase local currency debt asset as well as seriously deteriorate central bank's balance sheet As a result, central banks are considerably conservative in terms of floating local currency mechanism and nominal foreign exchange rate fluctuation To improve public confidence towards VND, the Government should introduce medium-long term target inflation Once target inflation is adopted, there is possibly more room for better collaboration between monetary policy and other macroeconomic ones which finally maximize national competitiveness in the process of international integration 39 REFERENCES Bandera Pavlov (2010, p.11-20), “A study of exchange rate pass-through in Ukraine”, Kyiv school of Economics GoldBerg G and 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486.7100 572.4470 621.8816 NA 330.4742 111.4580 51.90643* 2.16e-12 1.83e-16 9.87e-18 3.77e-18* -12.67504 -22.08550 -25.12235 -26.34408* -11.83060 -20.18551 -22.16681 -22.33299* -12.36972 -21.39852 -24.05372 -24.89380* * indicates lag order selected by the criterion LR: sequential modified LR test statistic (each test at 5% level) FPE: Final prediction error AIC: Akaike information criterion SC: Schwarz information criterion HQ: Hannan-Quinn information criterion Model 2: Lag LogL LR FPE AIC SC HQ 207.4491 392.4238 465.1405 536.5785 685.1186 NA 295.9595 98.16756 78.58185 126.2591* 4.56e-11 1.57e-14 1.59e-15 1.95e-16 6.38e-19* -9.622454 -17.62119 -20.00702 -22.32893 -28.50593* -8.989124 -15.93231 -17.26259 -18.52895 -23.65040* -9.393462 -17.01054 -19.01472 -20.95497 -26.75033* * indicates lag order selected by the criterion LR: sequential modified LR test statistic (each test at 5% level) FPE: Final prediction error AIC: Akaike information criterion SC: Schwarz information criterion HQ: Hannan-Quinn information criterion 42 APPENDIX VEC RESIDUAL SERIAL CORRELATION LM TEST Model 1: VEC Residual Serial Correlation LM Tests Null Hypothesis: no serial correlation at lag order h Lags LM-Stat Prob 25.60656 21.39615 26.16098 31.60152 0.4288 0.6703 0.3990 0.1699 Probs from chi-square with 25 df Model 2: VEC Residual Serial Correlation LM Tests Null Hypothesis: no serial correlation at lag order h Lags LM-Stat Prob 21.79381 23.92868 20.35922 24.42290 0.6476 0.5235 0.7277 0.4951 Probs from chi-square with 25 df 43