Export-led growth hypothesis: a multivariate cointegration and causality evidence for Jordan

Empirical evidence supporting the export-led growth (ELG) hypothesis has been mixed and inconclusive. Many previous studies may have been misspecified since they tested the ELG hypothesis using bivariate models. Other studies used cointegration and error correction models in a multivariate framework, but failed to tackle the important issues of unit root testing and optimal lag length when testing for cointegration. Following Dhawn and Biswal (1999), this study examines the ELG hypothesis for Jordan in a multivariate framework by including terms of trade as a third variable and by using available annual data (1969-2005). We utilize Johansen and Saikkonen and Lütkepohl cointegration procedures and error correction modeling to test long-run and short-run relations between GDP, exports, and terms of trade. The study finds that real GDP, real exports, and terms of trade are cointegrated. The evidence suggests long-run bidirectional causality between real exports and real GDP. The results of this study suggest that promoting exports via export promotion policies will contribute to economic growth in Jordan.