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Bilateral Relationship between Consumption and GDP in Mexico and the USA: A Comment

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  • Gomez Zaldivar, M.

    ()

  • Ventosa-Santaularia, D.

    ()

Abstract

This article presents a critical appraisal of three different econometric techniques commonly employed to analyze causal relationships among economic series. Our results indicate that the empirical application of the Granger causality test, the Engle-Granger cointegration test and the Hausman test for causality performed with small samples suffers severe size distortions, and therefore that the results should be taken with caution. Furthermore, we show that these tests produce better results if the series are differentiated. Our results are applied to the series for consumption and GDP in Mexico and the US and suggest that these series are cointegrated in the case of the US only (causality and cointegration are different). We comment upon these results in relation to the conclusions of Guisan (2004), and other related studies, in which several methods are used to analyze the bilateral causality between consumption and GDP in Mexico and the US and where it was found that cointegration and Granger causality tests may fail to detect the true causal relationships.

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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): 9 (2009)
Issue (Month): 1 ()
Pages:

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Handle: RePEc:eaa:aeinde:v:9:y:2009:i:1_6

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Related research

Keywords: Granger causality test; cointegration; Mexico; the US; consumption and Gross Domestic Product;

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  1. Antonio E. Noriega & Daniel Ventosa-Santaulària, 2007. "Spurious Regression and Trending Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(3), pages 439-444, 06.
  2. Manuel Gomez & Daniel Ventosa-Santaularia, 2008. "Testing for a Deterministic Trend when there is Evidence of Unit-Root," Department of Economics and Finance Working Papers EM200801, Universidad de Guanajuato, Department of Economics and Finance, revised Jun 2010.
  3. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
  4. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  5. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  6. Fabio Busetti & Andrew Harvey, 2007. "Testing for trend," Temi di discussione (Economic working papers) 614, Bank of Italy, Economic Research and International Relations Area.
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