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Temporal aggregation, causality distortions and a sign rule

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  • Tilak Abeysinghe
  • Gulasekaran Rajaguru

Abstract

Temporally aggregated data is a bane for Granger causality tests. The same set of variables may lead to contradictory causality inferences at different levels of temporal aggregation. Obtaining temporally disaggregated data series is impractical in many situations. Since cointegration is invariant to temporal aggregation and implies Granger causality this paper proposes a sign rule to establish the direction of causality. Temporal aggregation leads to a distortion of the sign of the adjustment coefficients of an error correction model. The sign rule works better with highly temporally aggregated data. The practitioners, therefore, may revert to using annual data for Granger causality testing instead of looking for quarterly, monthly or weekly data. The method is illustrated through three applications.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 73.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:ausm04:73

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Keywords: Granger causality test; cointegration; ecm; sign rule;

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