Multivariate Cointegration and Error Correction Models: An Application to Manufacturing Activity in Australia.

This paper uses the Johansen multivariate cointegration procedure to test for the existence of long-run (cointegrating) relationships between employment, output, output prices, input prices and wages for the Australian manufacturing sector using quarterly data from 1975 until 1988. Three cointegrating vectors are found. Input prices do not appear in any of the cointegrating vectors and, both input prices and output prices can be regarded as being weakly exogenous to the system of equations. Using these long-run relationships, three short-run error correction models are built. The results from these short-run models suggest that wages have contributed substantially to movements in employment, while output plays only a small role in determining employment in both the short- and long-run. Copyright 1993 by Scottish Economic Society.