WHAT CAUSES WHAT? AVIATION DEMAND AND ECONOMIC GROWTH IN ROMANIA: COINTEGRATION ESTIMATION AND CAUSALITY ANALYSIS

This paper is empirically analyses the aviation-led growth hypothesis for Romania by testing causality between aviation and economic growth. We resort to econometric tests such as unit root tests and test of cointegration purposed by Johansen (1988). Fully Modified OLS, Dynamic OLS and Conical Cointegration Regression are used to estimate the cointegration equation for time span of 1970 to 2012. Empirical results reveal the existence of cointegration between aviation demand and economic growth. Graphic methods such as Cholesky impulse response function (both accumulated and non-accumulated) and variance decomposition have also been applied to render the analysis rigorous. The positive contribution of aviation demand to economic growth is similar in all three estimation techniques of cointegration equation. Finally Granger causality test is also applied to find the direction of causal relationship. Findings help in chalking out the importance of aviation industry in economic growth for Romania.