Economic Interaction Between Malaysia and North Sumatra: An Analysis With Vector Error Correction Model and Granger Causality

Muhammad Nasir
International Journal of Economics & Business Administration, Volume VII, Issue 2, 61-70, 2019

Abstract:

Purpose: This study aims to explain the economic interaction of North Sumatra province in Indonesia with the Malaysian economy and vice versa. The variables studied were the North Sumatra PDRB proxy from the economy of North Sumatra, Malaysia's GDP proxy from the Malaysian economy, Export-Import from both regions. Design/methodology/approach: This study uses time series data from 1990-2016. Test and analysis tools use descriptive statistics, ordinary least square (OLS), unit root tests, cointegration tests, vector error correction models (VECM), impulse response functions, granger causality tests. Findings: The results show that Malaysia's economy has a positive and significant impact on North Sumatra's exports to Malaysia, and North Sumatra's exports to Malaysia have a positive and significant impact on Malaysian exports to North Sumatra , meaning there is a two-way relationship. Moreover, North Sumatra's exports to Malaysia have a negative and significant impact on Malaysia's economy. Practical implications: The results show that the increasing economy of North Sumatra caused an increase in North Sumatra imports from Malaysia as well as an increase in Malaysia's economy which led to an increase in Malaysian imports from North Sumatra. Originality/value: This study shows the economic interaction and trade relationship analysis between neighbouring regions with multiple examinations of Vector Error Correction Model And Granger Causality.


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