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Granger causality tests in the presence of structural changes

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  • Marco Bianchi

Abstract

Granger causality tests are widely used in applied economics as a way of establishing if a variable has been a leading indicator of another over the past. However, like most statistical tests, Granger causality tests require that the relationship between the variables remains stable over the sample period being tested. This paper illustrates that, if significant structural change occurs, these tests can provide misleading results. The paper then goes on to describe a statistical method that identifies structural breaks in a given data sample. Having identified them, Granger Causality tests are adjusted to make them 'robust' to those breaks. The paper also presents an application of the method to Canadian GNP and M1.

Suggested Citation

  • Marco Bianchi, 1995. "Granger causality tests in the presence of structural changes," Bank of England working papers 33, Bank of England.
    • Handle: RePEc:boe:boeewp:33
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1995/wp33.pdf
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    References listed on IDEAS

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    1. Breedon, F J & Fisher, P G, 1996. "M0: Causes and Consequences," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(4), pages 371-387, December.
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    3. Miles, David, 1993. "Testing for Short Termisn in the UK Stock Market," Economic Journal, Royal Economic Society, vol. 103(421), pages 1379-1396, November.
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    6. Paul Fisher & Suzanne Hudson & Mahmood Pradhan, 1993. "Divisia Indices for Money: An Appraisal of Theory and Practice," Bank of England working papers 9, Bank of England.
    7. Jo Corkish & David Miles, 1994. "Inflation, inflation risks and asset returns," Bank of England working papers 27, Bank of England.
    8. Joanna Paisley, 1994. "A Model of Building Society Interest Rate Setting," Bank of England working papers 22, Bank of England.
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    Cited by:

    1. Candelon, Bertrand & Hasse, Jean-Baptiste, 2023. "Testing for causality between climate policies and carbon emissions reduction," Finance Research Letters, Elsevier, vol. 55(PA).
    2. Ahdi Noomen Ajmi & Ghassen El Montasser & Duc Khuong Nguyen, 2014. "Carbon emissions - income relationships with structural breaks: the case of the Middle East and North African countries," Working Papers 2014-296, Department of Research, Ipag Business School.

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