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An Out of Sample Test for Granger Causality

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  • Norman R. Swanson

    (Texas A & M University)

Abstract

Granger (1980) summarizes his personal viewpoint on testing for causality, and outlines what he considers to be a useful operational version of his original definition of causality (Granger (1969)), which he notes was partially alluded to in Wiener (1958). This operational version is based on a comparison of the 1-step ahead predictive ability of competing models. However, Granger concludes his discussion by noting that it is common practice to test for Granger causality using in-sample F-tests. The practice of using in-sample type Granger causality tests continues to be prevalent. In this paper we develop simple (nonlinear) out-of-sample predictive ability tests of the Granger non-causality null hypothesis. In addition, Monte Carlo experiments are used to investigate the finite sample properites of the test. An empirical illustration shows that the choice of in-sample versus out-of-sample Granger causality tests can crucially affect the conclusions about the predictive content of money for output.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0362.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0362

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  1. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521632423.
  2. Christoffersen, Peter F. & Diebold, Francis X., 1997. "Optimal Prediction Under Asymmetric Loss," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 13(06), pages 808-817, December.
  3. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1149-67, July.
  4. Clark, Todd E. & McCracken, Michael W., 2001. "Tests of equal forecast accuracy and encompassing for nested models," Journal of Econometrics, Elsevier, Elsevier, vol. 105(1), pages 85-110, November.
  5. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 134-44, January.
  6. Bierens, H.J., 1989. "A consistent conditional moment test of functional form," Serie Research Memoranda, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics 0064, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  7. repec:cup:etheor:v:13:y:1997:i:6:p:808-17 is not listed on IDEAS
  8. Ashley, Richard, 1998. "A new technique for postsample model selection and validation," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(5), pages 647-665, May.
  9. Christiano, Lawrence J. & Ljungqvist, Lars, 1988. "Money does Granger-cause output in the bivariate money-output relation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(2), pages 217-235, September.
  10. Lawrence J. Christiano & Lars Ljungqvist, 1987. "Money does Granger-cause output in the bivariate output-money relation," Staff Report, Federal Reserve Bank of Minneapolis 108, Federal Reserve Bank of Minneapolis.
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