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Granger-Causality in the presence of structural breaks

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Author Info
Daniel Ventosa-Santaulària () (Universidad de Guanajuato)
José Eduardo Vera-Valdés () (Universidad de Guanajuato)

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Abstract

The concept of Granger-Causality (GC) is widely used to draw inference concerning causality in applied economics. Stationary series are the term of reference used in GC testing, which is generally studied by means of a standard Dickey-Fuller test. We prove that, when the Data Generating Process (DGP) of the variables is either Broken-Trend Stationary (BTS) or Broken-Mean Stationary (BMS), correct inference can not be drawn from a standard Granger-Causality test and may identify inexistent causal relationships, even if the former variables are differenced. Asymptotic and finite-sample evidence in this sense is provided.

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File URL: http://economicsbulletin.vanderbilt.edu/2008/volume3/EB-08C20013A.pdf
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Publisher Info
Article provided by Economics Bulletin in its journal Economics Bulletin.

Volume (Year): 3 (2008)
Issue (Month): 61 ()
Pages: 1-14
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Handle: RePEc:ebl:ecbull:v:3:y:2008:i:61:p:1-14

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Postal: Economics Bulletin, Department of Economics, 414 Calhoun Hall, Vanderbilt University, Nashville TN 37235, USA
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Related research
Keywords: Granger-causality; structural breaks;

Find related papers by JEL classification:
C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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