A MULTIVARIATE ECONOMETRIC ANALYSIS OF INTERNATIONAL ECONOMIC INTEGRATION USING LINEAR ALGEBRA AND CONSTRAINED OPTIMIZATION TECHNIQUES

Abstract

Global economic integration is one of the more prominent features of the current global economy. The more connected the nations of the world become via trade, investment, markets, finance, and technology, as well as cooperative economic and financial arrangements, the more advanced and developed analytical tools will be needed to understand the complex interrelationships of economic variables. This study offers an advanced technique involving multivariate integration of international economy systems, the elements of linear algebra, and constrained optimization. Specifically, the study explores the links trade liberalization, foreign direct investment (FDI), economic growth, the stability of exchange rates, and the degree of capital mobility and their interrelationships in a sample of cross-country systems. Using the technique of eigenvalue decomposition, strong common factors were identified that influence regional economic integration in a convergent manner. The results of the optimization process indicate that the instability of the economy can be minimized while the gains from economic integration can be maximized through the trade liberalization policy, the liberalization of foreign direct investment, and the stabilization of exchange rates. The study combines econometrics and mathematical econometrics which advances the field of international economics. It shows the benefits of having focused economic policies and plans that incorporate periodic regional evaluations as a way of achieving sustainable economic integration. It proposes the building of regional and global cooperation to stimulate economic and financial stability and an improvement of the investment framework.