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Present Value Relations, Granger Noncausality, And Var Stability

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  • Fanelli, Luca

Abstract

When in "exact" present value (PV) relations the decision variables do not Granger cause the explanatory variables and a VAR process is used to derive restrictions, the system embodies explosive roots. Hence any test of the PV restrictions would reject the null if the system incorporates Granger non-causality constraints. This paper investigates the issue.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Econometric Theory.

Volume (Year): 23 (2007)
Issue (Month): 06 (December)
Pages: 1254-1260

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Handle: RePEc:cup:etheor:v:23:y:2007:i:06:p:1254-1260_07

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  1. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
  2. Johansen, Soren & Swensen, Anders Rygh, 1999. "Testing exact rational expectations in cointegrated vector autoregressive models," Journal of Econometrics, Elsevier, Elsevier, vol. 93(1), pages 73-91, November.
  3. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Fanelli, Luca, 2002. "A new approach for estimating and testing the linear quadratic adjustment cost model under rational expectations and I(1) variables," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 26(1), pages 117-139, January.
  5. Thomas J. Sargent, 1978. "A note on maximum likelihood estimation of the rational expectations model of the term structure," Staff Report, Federal Reserve Bank of Minneapolis 26, Federal Reserve Bank of Minneapolis.
  6. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
  7. Engsted, Tom & Haldrup, Niels, 1994. "The Linear Quadratic Adjustment Cost Model and the Demand for Labour," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 9(S), pages S145-59, Suppl. De.
  8. Luca Fanelli, 2006. "Dynamic adjustment cost models with forward-looking behaviour," Econometrics Journal, Royal Economic Society, vol. 9(1), pages 23-47, 03.
  9. Richard Meese, 1980. "Dynamic factor demand schedules for labor and capital under rational expectations," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 153, Board of Governors of the Federal Reserve System (U.S.).
  10. Timmermann, Allan, 1994. "Present value models with feedback : Solutions, stability, bubbles, and some empirical evidence," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 18(6), pages 1093-1119, November.
  11. Fanelli, Luca, 2006. "Multi-equational linear quadratic adjustment cost models with rational expectations and cointegration," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(3), pages 445-456, March.
  12. Geert Bekaert & Robert J. Hodrick, 2000. "Expectations Hypotheses Tests," NBER Working Papers 7609, National Bureau of Economic Research, Inc.
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Cited by:
  1. Phillips, Peter C.B. & Magdalinos, Tassos, 2013. "Inconsistent Var Regression With Common Explosive Roots," Econometric Theory, Cambridge University Press, vol. 29(04), pages 808-837, August.

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