Capital Formation and Economic Growth in Mauritius

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Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225(i) Impact of capital formation on growthIn the ARDL bounds testing approach, the first step is to specify the short-run effects in ECMformat so as to establish existence of long-run relationship among variables. Thus, equation [5]is transformed into [6] as:rgdpcqgii 1tfdit0i1rgdpcqzii 1zt 1t it2privt 13pubt 14fdit 1z5 t 1pq fkrgdpct1k 1 i 1iprivtiq pi 1i[6]pubtiIn the above ARDL-ECM equation represents the drift parameter, andjare the long- andshort-run multipliers, andare white noise error terms. The equation is similar to those of Engleand Granger (1987), except that it comprises a linear combination of the lagged level variables inplace of the lagged error-correction term. Following Pesaran et al. (2001), cointegration can beexpected if the long-run coefficients of all lagged level variables are jointly significant (i.e.values of, for i = 1,..,4). The ARDL-ECM equation is estimated and the F-test is carriedout to test the null hypothesis of no cointegration. 12H 0: λ 1 = λ 2 =λ 3 = λ 4 = λ 5 = 0H 1 : λ 1 ≠ λ 2 ≠ λ 3 ≠ λ 4 ≠ λ 5 ≠ 0Note, the F-test follows an asymptotic non-standard distribution and the critical F-values areobtained from Pesaran et al. (2001). The test generates two asymptotic critical valuesrepresenting the lower and the upper bounds. The two asymptotic critical bounds provide a testfor cointegration when the independent variables are I(d), if and only if 0 ≤ d ≤ 1. Table 2.9compares the computed F-statistics of the model with the bounds, the findings confirms that thecomputed F-statistics is greater than the upper bound critical value at 1% significance level, the12 According to Pesaran et al. (1997), OLS coefficients of first differences are of no direct interest to the boundscointegration test.19
Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225null hypothesis of no cointegration is, therefore, rejected. 13 In a nutshell the results confirmsstable long run cointegration relationship between economic growth and measures of capitalformation.Table 9: bounds test resultsDependent variable F-statistics 1% Critical F-valuesLower boundUpper boundrgdpc 14.2070 3.15 4.43Note: Critical Values are cited from Pesaran et al. (2001), Table CI (iii), Case 111: Unrestrictedintercept and no trend.The second step is about estimation of long- and short-run impacts. The long-run impacts can becaptured in the theoretical ARDL (p, q f , q p , q g , q z ) model written as follows:rgdpcqci 0t4iztbipk 1tkrgdpctkqfi 01iprivtiqpi 02ipubtiqgi 03i[7]fditiIn line with Bahmani-Oskooee and Ardalani (2006), out of the long-run coefficients a laggederror correction term, denoted by ECM t-1 , is generated to replace linear combination of laggedvariables, and re-estimate the models at the optimum lags. The short-run dynamic parameters areobtained by estimating an error correction model associated with long-run estimates, as perequation [8]. Where coefficientsj represent short-run effects and coefficient of ECM t-1 , i.e., gives the speed of adjustment or convergence to long-run equilibrium. Based on Banerjee et13 The lower bound assumes that all the regressors are I(0), and the upper bound assumes I(1). If the computed F-statistics lies above the upper bound, the null is rejected, indicating cointegration. If the computed F-statistics liesbelow the lower bound, the null cannot be rejected, supporting the absence of cointegration. If the statistics fallwithin the bounds, inference is inconclusive.20
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