Aviation Demand and Economic Growth in the Czech Republic: Cointegration Estimation and Causality Analysis

The main purpose of the paper is to empirically examine the aviation-led growth hypothesis for the Czech Republic 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 42 years from 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 lime-lighting the importance of aviation industry in economic growth for a developing country like the Czech Republic