Mathematical Theory and Modeling www.iiste.org ISSN 2224-5804 (Paper) ISSN 2225-0522 (Online) Vol.8, No.1, 2018 34 Vector Autoregressive Models for Multivariate Time Series Analysis; Macroeconomic Indicators in Ghana Erasmus Tetteh-Bator 1* , Mohammed Adjei Adjieteh 1 2 , Lin Chun Jin 3 , Theophilus Quachie Asenso 4 1, 3 College of Science, Hohai University, No. 1 Xikang Road, 211100, Nanjing, China. 2 School of Finance, Shanghai University of Finance and Economics, No.777 Guoding Road, Shanghai, 200433, China. 4 African Institute for Mathematical Sciences (AIMS), Cameroon. * E-mail of the corresponding author: erasmusbator@hhu.edu.cn Abstract This study investigated the relationship, the percentage contribution of endogenous shocks and the direction of causality between real gross domestic product, exchange rate, foreign direct investment and unemployment rate in Ghana. It employed the multivariate Johansen co-integration test via vector auto-regressive model and the vector error correction model, to examine both long-run and short-run dynamic relationships respectively, between the selected macroeconomic variables for the period 1991-2016. The dynamic interactions between the variables were studied with Granger causality tests, impulse response functions, and forecast error variance decompositions. Augmented Dickey-Fuller (ADF) test indicated that all the variables were stationary after their first differencing, thus variables are integrated of order one, I (1). The diagnostic tests on the model residuals revealed that the models were adequate, valid and stable. The Trace test statistic of the Johansen cointegration test indicated one cointegrating relationship indicating long run relationship among the variables. Granger Causality analysis indicated a uni–directional causal relationship between real GDP and FDI. It also showed that FDI Granger-causes all of the other variables. The results revealed the positive effect and sensitivity of the FDI variable in determining the activities pertaining to real GDP, exchange rate, and unemployment rate and vice versa in the Ghanaian economy. Keywords: Vector Autoregression Model (VAR), Multivariate Time Series, Macroeconomic Variables, Cointegration, Granger causality, Impulse response function, Forecast error variance decomposition, Abstract 1. Introduction Countries all over the world, in spite of their history, geographical location or political status aims to achieve and maintain high economic growth coupled with low or high values of major macroeconomic variables such as real GDP, inflation, exchange rates, FDI, stock prices, unemployment rate among others to influence growth and development of the country. (Maghayereh, 2002). Gross domestic product (GDP) refers to the value of all final goods and services produced within a country or an area during a time period. It is often considered the best standard of measuring national economic conditions (Mankiw & Taylor 2007). GDP is the primary indicator which is used to check the financial health status of a country as a whole and GDP per capita is often combined with measures of the purchasing power parity (PPP) to measure people’s living standard more objectively (Larsson & Harrtell, 2007). GDP Growth Rate in Ghana averaged 1.98 percent from 2006 until 2016, reaching an all-time high of 8.10 percent in the first quarter of 2012 and a record low of -2.20 percent in the fourth quarter of 2008. Exchange rate also known as Foreign exchange rate or Forex rate between two currencies is the price of one currency in terms of another. Exchange rate is the value of a foreign nation currency in terms of the home nation’s currency. Exchange rates are important economic indicators that affect the relative price of domestic and foreign goods. The dollar price of Ghana goods to an American is determined by the interaction of two factors, the price of Ghana goods in cedis and the cedi/dollar exchange rate. Many researchers attribute exchange rate volatility to the fact that, it is empirically difficult to predict future exchange rate values (Killian and Taylor, 2001; Taylor, J., 2001). Foreign direct investment (FDI) is an investment made by a company or individual in one country, whose business interests is in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company. FDI is an brought to you by CORE View metadata, citation and similar papers at core.ac.uk provided by International Institute for Science, Technology and Education (IISTE): E-Journals