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Causality and Cointegration between Consumption and GDP in 25 OECD countries: limitations of cointegration approach

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  • Guisan, M.Carmen

Abstract

A critical review of cointegration is presented in this paper, emphasizing some limitations of this approach to testing causal relations in Econometrics. Very often the usual way of analysing cointegration leads researchers to declare many important causal relations as spurious when they are obviously not. On the other hand that approach does not always avoid the peril of accepting as causal relations those that really are spurious. An application of the tests to the relation between Private Consumption and Gross Domestic Product in 25 OECD countries, during the period 1960-97, is performed and the results confirm the above mentioned limitations of cointegration tests. The most extreme case is that of the UK where, in one of the applications, the usual tests lead to rejection of cointegration between british Private Consumption and british GDP and acceptance of cointegration of british Private Consumption with GDP of all the other countries. Regarding cointegration we should take into account two important points: one is that many causal relations with autocorrelation coefficient of residuals near 0.9 show a result of uncertainty, or a result of near cointegration, and should not be counted as rejections. A second, equally important point, is that sometimes the problem of no cointegration among several variables, is due to small problems in the specification of the model, easily avoided with some changes in the form of the dynamic relation, and not to the existence of non-causal relations.

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Bibliographic Info

Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

Volume (Year): 1 (2001)
Issue (Month): 1 ()
Pages: 39-61

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Handle: RePEc:eaa:aeinde:v:1:y:2001:i:1_2

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  1. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
  2. Klein, Lawrence R., 1981. "Autobiography," Nobel Prize in Economics documents 1980-2, Nobel Prize Committee.
  3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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Cited by:
  1. Guisan, M.C. & Aguayo, E., 2005. "Employment, Development and Research Expenditure in European Union: analysis of causality and comparison with the United States, 1993-2003," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(2), pages 21-30.
  2. Mustafa Akal, 2006. "Causalities Among Growth Related Policy Variables In Turkey, 1950-2004," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).
  3. Chowdhury, K, 2005. "What´s Happening to Per Capita Gdp in the ASEAN Countries?. An Analysis of Convergence, 1960-2001," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 5(3).
  4. Arranz, M., 2002. "Forecasting Private Consumption Structure in European Countries: SKIM Model Results and Comparison with other Approaches," Economic Development 54, University of Santiago de Compostela. Faculty of Economics and Business. Econometrics..
  5. Konya, L., 2004. "Export-Led Growth, Growth-Driven Export, Both or None? Granger Causality Analysis on OECD Countries," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(1).
  6. Guisan, M.Carmen, 2002. "Causalidad y cointegracion en modelos econometricos: Aplicaciones a los paises de la OCDE y limitaciones de los tests de cointegracion," Economic Development 61, University of Santiago de Compostela. Faculty of Economics and Business. Econometrics..
  7. Guisan, M.C. & Iglesias, A., 2002. "Las Industrias Derivadas de la Madera En España (1964-90). Comparacion internacional, modelos econometricos y analisis de causalidad," Economic Development 52, University of Santiago de Compostela. Faculty of Economics and Business. Econometrics..
  8. Konya, Laszlo, 2004. "Unit-Root, Cointegration and Granger Causality Test Results for Export and Growth in OECD Countries," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 1(2), pages 67-94.
  9. Osinubi, T. S. & Amaghionyeodiwe, L. A, 2009. "Foreign Direct Investment and Exchange Rate Volatility in Nigeria," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 9(2).
  10. Al-Rjoub, S., 2005. "Effect of Oil Price Shocks in the U.S. for 1985-2004, using VAR, Mixed Dynamic and Granger Causality Approaches," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 5(3).

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