An Assessment of Demand for Imports through the VECM Model

This chapter analyses the factors that affect the demand for imports in Albania during the period 1999-2011. This paper use an error correction model to measure the elasticity of import flows of goods in Albania, related to real demand, developments in trade liberalization, and transfers from abroad and fluctuations in the value of currency; as well as shed light on economic policies in restricting trade deficits. Econometric analysis of this study includes a set of variables part of demand for imports.

Based on theoretical principles and research experience, the analysis in this paper consists in treating imports as a function not only of GDP (economic activity), effective exchange rate, but also as a function of remittances and the level of liberalization of the trade regime, represented by the average import tariff (trend which clearly shows the progress of trade liberalization). The assessment of the impact of these factors is achieved using the vector error correction model (VECM = vector error correction model). At first, the analysis begins by specifying tests theoretical hypotheses and analytical equations, which describes the theoretical relationship.

The following step consists on the selection of econometric model, which in our case was chosen to be the VECM model. The following section consists on a deeper analysis in econometric model specification, and the steps to follow to calculate its parameters.

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