Granger Causal Analysis Essay

METHODOLOGY

Study Area and Sampling Procedure

This study on the relationship between agricultural production and export diversification was conducted in South Africa. The study used secondary time series data that were sourced from the National Department of Agriculture, Fishery and Forestry Statistical Directorate covering a sample size of 17 years of apple, avocado, mango and orange production and diversified export in South Africa.

Analytical Technique

The Granger Causality model was adopted to analyse the variables which had an effect on the relationship between apple, avocado, mango and orange production and diversified export in South Africa.

Granger Causality Model

The most common way to test the causal relationship between two variables is the Granger Causality proposed by Granger (1969). The test involves estimating the following simple Vector Auto Regressions (VAR). (1) (2)

Where it is assumed that the disturbances and are uncorrelated. Equation (1) represents that variable is decided by variable and so does equation (2) except that its dependent variable is instead of . Both variables were lagged in order to account for the

As the alternative Granger Causality test, when the process is considered for a long-run causal relationship, and that the time series should contain unit root, stationary at the same order of its integration, and then co-integrated (Engle and Granger 1987). However, the procedure by Toda and Yamamoto (2005) has been found superior in terms of accuracy in any potential of non-stationary and co-integration between the time series before testing for the causality. Therefore, this procedure is utilised to present the direction of a long-long causal relationship between agriculture and economic growth which can be expressed by following a bi-variate regressive