An Empirical Analysis of Macroeconomic Drivers of Long Run Growth Using FMOLS and VECM

This paper focuses on the relationships between economic development and Foreign Direct Investment (FDI) flows, trade openness, inflation and government spending in Emerging Markets and Developing Economies (EMDEs). To monitor these linkages, we used Fully Modified Least Squares (FMOLS) and Vector Error Correction Models (VECM) as econometrics techniques that reflect short-run dynamics and long-run relation between the variables. FMOLS methodology is employed to control for endogeneity and serial correlation in the data while VECM is pragmatic to understand the long run system dynamics in identifying how the economy responds to shocks. This study uses a yearly time series dataset for 33 years from 1990 to 2023 from the sample of developing countries. Our findings indicate that FDI scarcely has an economic expansion effect in the long run especially when trade openness and moderate inflation levels are adopted. Further, based on the VECM model results, it is established that any difference with the trend growth rate is corrected in the long-term that supports the existence of endogenous and exogenous macroeconomic factors in the context of sustainability.