Application of Cointegration Analysis & Error-Correction on the Data of Sudanese Foreign Trade Sector

Abstract

This study attempts to test the existence of long-run Cointegration relationship in export and import demand functions for Sudan and to determine the short-run dynamics of it. The study uses annual observation on the models variables for the period (1970-2006). Engle-granger, JJ and Hendry methods were used for testing the long-run Cointegration relationship, which were found three attributes, from of error correction model, where determined on the basis of longrun relationship. The first model was derived from Engle-Granger method’s, the second model was derived from Johansen and Juselius method, but the third model was derived Hendry method of Cointegration. The empirical result of unit root tests showed that the variables export of goods, import of goods, domestic product, consumer price index, consumer price for the industrial countries, GDP deflator and an aggregate demand have a unit root i.e. it does not accept hypothesis of the stationarity of such time series. It was clear that, through the application of Hendry test of Cointegration, that there is stationary and equivalent relation in long run between the variables of the study. The error terms test, which carries the negative sign and is statistically significant, indicated that the variables of the export demand and the variables of import demand are cointegrated in Hendry model, and that the speed of adjustment of the equilibrium status in the import demand model is greater than export demand model. This amounted to 75%, 56% respectively.