Economic Interaction Between Malaysia and North Sumatra: An Analysis With Vector Error Correction Model and Granger Causality

Purpose: This study aims to explain the economic interaction of North Sumatra province in
Indonesia with the Malaysian economy and vice versa. The variables studied were the North
Sumatra PDRB proxy from the economy of North Sumatra, Malaysia's GDP proxy from the
Malaysian economy, Export-Import from both regions.
Design/methodology/approach: This study uses time series data from 1990-2016. Test and
analysis tools use descriptive statistics, ordinary least square (OLS), unit root tests,
cointegration tests, vector error correction models (VECM), impulse response functions,
granger causality tests.
Findings: The results show that Malaysia's economy has a positive and significant impact on
North Sumatra's exports to Malaysia, and North Sumatra's exports to Malaysia have a
positive and significant impact on Malaysian exports to North Sumatra , meaning there is a
two-way relationship. Moreover, North Sumatra's exports to Malaysia have a negative and
significant impact on Malaysia's economy.
Practical implications: The results show that the increasing economy of North Sumatra
caused an increase in North Sumatra imports from Malaysia as well as an increase in
Malaysia's economy which led to an increase in Malaysian imports from North Sumatra.
Originality/value: This study shows the economic interaction and trade relationship analysis
between neighbouring regions with multiple examinations of Vector Error Correction Model
And Granger Causality.