The analysis of cointegration relationships in the study of economic growth in the Republic of Azerbaijan

Abstract

In recent years, significant strides have been made toward fostering economic growth in the Republic of Azerbaijan, with the oil sector emerging as the principal driving force of the national economy. However, the volatile nature of oil revenues and fluctuations in the global energy market have revealed that heavy reliance on this sector poses substantial risks to economic stability. Consequently, the development of the non-oil sector and the pursuit of sustainable economic growth have become central objectives of state policy. In this context, the investigation of long-term relationships among key macroeconomic indicators—such as Gross Domestic Product (GDP), the oil sector, and the non-oil sector— plays a critical role in the analysis of economic growth. This paper employs time series analysis to examine whether long-term relationships exist among GDP, the oil sector, and the non-oil sector in the Azerbaijani economy. The empirical analysis is conducted using the EViews software. In the initial stage, the stationarity of the variables is tested using the Augmented Dickey-Fuller (ADF) test. This step is essential for determining the order of integration of the variables (i.e., I(0), I(1), etc.). If all variables are found to be integrated of the same order, specifically I(1), the Johansen cointegration test is applied to assess the existence of long-term equilibrium relationships among them. Should one or more cointegration vectors be identified, this would indicate the presence of long-run economic linkages. In such a case, a Vector Error Correction Model (VECM) is constructed to analyze the short-run dynamics of these relationships. The VECM captures both the long-run equilibrium relationship and the system’s response to deviations from this equilibrium.