Manufacturing output in Romania: An ARDL approach

Abstract

This paper empirically investigates manufacturing output function for Romania by using the quarterly time series data during the period 2000q1-2013q4. Research variables are manufacturing production index, labor cost index, producer energy price index, interest rate, exchange rate and a time dummy variable measuring the effect of Romania’s participation to European Union. Long-run and short-run elasticities of variables were examined using the bounds testing cointegration method proposed by Pesaran et al. (2001). Results of the analysis show that Romania has a long run cointegration. The dynamic error correction model for Romania is found and subsequently long-run and short-run elasticity coefficients are explored by using ARDL model. It is detected that logs of energy price index, labor cost index and interest rates have a substantial long-run effect on the log of manufacturing production index with respective long-run elasticity coefficients of -0.51% (LNEPI), 0.57% (LNLCI) and -0.05% (for LNINR). Log of exchange rates does not have a long-run effect on the log of manufacturing production index. Causality test using the Toda and Yamamoto (1995) Granger non-causality procedure was employed in order to examine Granger causalities between variables and unidirectional Granger causalities as (LNLCI→LNMPI) , (LNINR→LNMPI), (LNEXR→LNINR) and (LNEPI→LNMPI) are detected. CUSUM and CUSUMSQ stability tests on hypothesized manufacturing output function were also implemented.