ECON3300/7360
GRANGER CAUSALITY
References:
- The few pages on Causality (look under Contents page or the Index) in
Ramanathan's
Introductory Econometrics with Applications
.
- Pg 425-427 of the Mukerjee Text.
ε
+
β
+
β
=
X
Y
1
0
X causes Y
To check if X causes Y (but not estimate the effect)
Granger Causality Test
If X causes Y and Y causes X
feedback effects, bi-directional causality
X and Y are jointly determined.
E.g.
①
Price of commodity and quantity of commodity sold.
②
Does money SS cause changes in interest rate or the other way round?
③
Is C = f (Y) or Y = f (C)?
Consider the following structural model
y
t
=
σ
x
t
+
β
11
y
t-1
+
β
12
x
t-1
+
є
1t
x
t
=
γ
y
t
+
β
21
y
t-1
+
β
22
x
t-1
+
є
2t
H
1
:
γ
=
β
21
= 0
(Current and past influences of y do not affect x)
H
2
:
γ
= 0
(Current influence of y does not affect x)
endogeneity
exogeneity
Clive Granger 1969
article in
Econometrica
1

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