LONG RUN RELATIONSHIPS AND SHORT RUN DYNAMICS AMONG UNEMPLOYMENT AND DEMAND COMPONENTS: A STUDY ON SRI LANKA, INDIA AND BANGLADESH

Ramesh CHANDRA DAS

Associate Professor of Economics, Katwa College, WB, India

ramesh051073@gmail.com

Kamal RAY

(Retd), Associate Professor of Economics, Katwa College, WB, India

kamal420ray@yahoo.co.in

Abstract

Unemployment of an economy should have some associations with its aggregate demand components. With time series data for 1996-2015 on three aggregate demand components, namely, consumption expenditure (CON), capital formation (GCF) and public spending (GOV), we did econometric exercises such as cointegration, VECM and Wald test to test whether there are long run equilibrium relationships among unemployment (UN) and the three demand components and directions of their interplays in long run and short run frameworks. Doing appropriate diagnostic checking for the residuals of all the estimations, the results show that all the four series are cointegrated that justifies long run associationships among them. Further, the long run causality analysis through VECM reveals that UN, CON and GCF make a cause to GOV for Sri Lanka.  For India, UN is caused by all three components of aggregate demand and its CON is caused by UN, GCF and GOV. Bangladesh does not produce any such long run causal relationships among the variables. Further for short run causality results, CON is caused by UN, GCF and GOV in Sri Lanka and India, and for Bangladesh and India, there are short run causalities running from CON, GCF and GOV to unemployment. This means, aggregate demand components in India and Bangladesh influence the unemployment rates of these two countries

Keywords: Unemployment, aggregate consumption, government expenses, gross capital formation, cointegration, VECM, Wald test

JEL classification: J64, E21, E22, E24, H5, C32
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