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A Note on the Power of Money-Output Causality Tests

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Author Info
 Cheung, Yin-Wong
Fujii, Eiji

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Abstract

This study suggests that some empirical findings against money-output causality can be the consequence of ignoring autoregressive conditional heteroskedastic (ARCH) errors. Monte Carlo results confirm that ARCH effects drastically reduce the power of the standard causality test. The maximum likelihood approach allowing for ARCH effects, on the other hand, provides a good power performance. Using different specifications and sample period, Friedman and Kuttner (1993) and Thomas (1994) report limited evidence of money causing output. We detect significant ARCH effects in the models considered by these studies. Once ARCH effects are explicitly accounted for, we find that the monetary effect is significant though its magnitude is quite small. Copyright 2001 by Blackwell Publishing Ltd

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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

Volume (Year): 63 (2001)
Issue (Month): 2 (May)
Pages: 247-61
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Handle: RePEc:bla:obuest:v:63:y:2001:i:2:p:247-61

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  2. Jokipii , Terhi & Lucey, Brian, 2006. "Contagion and interdependence: measuring CEE banking sector co-movements," Research Discussion Papers 15/2006, Bank of Finland. [Downloadable!]
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  3. Lemmens, A. & Croux, C. & Dekimpe, M.G., 2004. "Decomposing Granger Causality over the Spectrum," Research Paper ERS-2004-102-MKT Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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