Linear and Nonlinear Growth Determinants: The Case of Mongolia and its Connection to China

Abstract

We investigate growth determinants for Mongolia as a small emerging economy considering China as its large neighbor. Our causality analysis from January 1992 to August 2017 reveals significant linear and nonlinear relationships in growth explanation. China’s GDP and coal prices, together with some of their linear and nonlinear lagged components, predict Mongolia’s GDP, where a one percent increase in China’s GDP relates to an increase in Mongolia of 1.5 percent. Current exchange rates and the nonlinear components of lagged levels of consumer prices also explain growth. Our results underline the role of macroeconomic drivers of growth in emerging economies.

Keywords: Gross Domestic Product (GDP); Economic Growth; Energy Prices; Coal Prices; Consumer Prices; Foreign Direct Investment (FDI); Exchange Rates; Cointegration; Multivariate Granger Causality; Nonlinear Granger Causality

JEL Classification: C53; E52; F42