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Testing for Granger (non-)causality in a time-varying coefficient VAR model

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Author Info

  • Dimitris K. Christopoulos

    (Department of Economic and Regional Development, Panteion University, Athens, Greece)

  • Miguel A. León-Ledesma

    (Department of Economics, Keynes College, University of Kent, Canterbury, UK)

Abstract

In this paper we propose Granger (non-)causality tests based on a VAR model allowing for time-varying coefficients. The functional form of the time-varying coefficients is a logistic smooth transition autoregressive (LSTAR) model using time as the transition variable. The model allows for testing Granger non-causality when the VAR is subject to a smooth break in the coefficients of the Granger causal variables. The proposed test then is applied to the money-output relationship using quarterly US data for the period 1952:2-2002:4. We find that causality from money to output becomes stronger after 1978:4 and the model is shown to have a good out-of-sample forecasting performance for output relative to a linear VAR model. Copyright © 2008 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 27 (2008)
Issue (Month): 4 ()
Pages: 293-303

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Handle: RePEc:jof:jforec:v:27:y:2008:i:4:p:293-303

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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  1. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. Psaradakis, Zacharias & Ravn, Morten O. & Sola, Martin, 2003. "Markov Switching Causality and the Money-Output Relationship," CEPR Discussion Papers 3803, C.E.P.R. Discussion Papers.
  3. Lutkepohl, Helmut & Herwartz, Helmut, 1996. "Specification of varying coefficient time series models via generalized flexible least squares," Journal of Econometrics, Elsevier, vol. 70(1), pages 261-290, January.
  4. Rothman, P. & Dijk, D.J.C. van & Franses, Ph.H.B.F., 1999. "A multivariate STAR analysis of the relationship between money and output," Econometric Institute Report EI 9945-/A, Erasmus University Rotterdam, Econometric Institute.
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  6. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
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  15. Li, Jing, 2006. "Testing Granger Causality in the presence of threshold effects," International Journal of Forecasting, Elsevier, vol. 22(4), pages 771-780.
  16. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
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Cited by:
  1. Matthieu Droumaguet & Tomasz Wozniak, 2012. "Bayesian Testing of Granger Causality in Markov-Switching VARs," Economics Working Papers ECO2012/06, European University Institute.

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