Academic journal article The Journal of Developing Areas

The Nature of Trends in the per Capita Real GDP of Gulf Cooperation Council (Gcc) Countries: Some Evidence and Implications

Academic journal article The Journal of Developing Areas

The Nature of Trends in the per Capita Real GDP of Gulf Cooperation Council (Gcc) Countries: Some Evidence and Implications

Article excerpt

ABSTRACT

In this paper we attempt to determine whether the per capita real incomes of GCC countries are trend or difference stationary. The distinction is crucial for at least three reasons: first pertains to forecasting; while a trend stationary series tends to return to its long run steady state following a shock, a difference stationary series would tend to carry the impact of such a shock forever. The second has econometric implications because even minor divergences from difference stationarity would lead to non-robust cointegration estimations. The third is about economic theory where the distinction between the neoclassical and endogenous growth models can be settled via empirics of difference or trend stationarity. As the GCC countries strive for more economic integration, correct identification of trends becomes vital in policy making. Our research shows that there is evidence that the per capita real GDP of GCC countries is difference stationary.

JEL Classifications: C22, C12, C23

Keywords: Unit roots, Structural Shift, Univariate Time Series, Transitional Dynamics, The Gulf Cooperation Council (GCC)

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

In this paper we would like to determine whether the per capita real incomes of Gulf Cooperation Council (GCC) countries are stationary around a trend, or their differences are stationary. As it will be explained in further detail below, the distinction is crucial for at least three reasons: The first one pertains to forecasting: While a trend stationary series tends to return to its long run steady state following a shock, a difference stationary series would tend to carry the impact of such a shock forever. Thus a negative shock would translate itself to a permanent underforecast of the series via difference stationary models. The second reason is about the econometric implications of the distinction as even minor divergences from difference stationarity would lead to non-robust cointegration estimations. The third one is about economic theory and policy: The theoretical debate about the relevance of neoclassical vs. endogenous growth models can be settled via empirical determination of the data to be difference or trend stationary. One might add to that the possible implications of the distinction on business cycle modeling. As the GCC countries strive to have more economic integration, correct identification of the issues involved becomes vital in policy making. This is because, in a unified GCC, a number of policy measures such as taxes and/or transfer payments, government expenditure are appropriated based on the current as well as future values of per capita income in GCC countries. This may translate itself to a transfer of wealth from one country to another, not only with economic but also with political ramifications (Miller and Genc, 2005). The consequences could be exacerbated if the citizenry and/or policy makers realize that the policy measures were adopted thanks to incorrect forecasting techniques. Therefore, for political and economic reasons, all constituencies must be aware of possibilities of income transfer and other issues involved before an integration attempt is launched for a more informed decision in this direction.

Until the seminal work of Nelson and Plosser (1982) which questioned the nature of the trend in the GNP within the US context, movements in real GNP were modeled as stationary fluctuations around a linear deterministic trend (Kydland and Prescott, 1980; and Blanchard, 1981). In other words, GNP is assumed to be trend stationary (TS). After 1980s, real GNP is widely considered to contain a unit root, and its first difference to be stationary, i.e. it is difference stationary (DS). There were efforts in the international context, as well, to identify the characteristics of the national income of a country. Gil-Alana (2004) models the real GDP series in France, Italy, Germany and the UK by means of fractionally integrated techniques based on Robinson (1994). …

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