Effects of simultaneity on testing Granger-causality – a cautionary note about statistical problems and economic misinterpretations
AbstractInterpreting Granger causality as economic causality implies that the underlying VAR model is a structural economic model. However, this is wrong if simultaneity occurs. Magnitude and stability of possible errors are analysed in a simulation study. It is shown that economic misinterpretations of tests of Granger causality can occur with probability one for realistic parameter values. Furthermore, the power of the test can be rather low even with a sample size of T=50.
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Bibliographic InfoPaper provided by Institute of Empirical Economic Research in its series Working Papers with number 93.
Date of creation: 12 Oct 2012
Date of revision:
Granger causality; test; simultaneity; instantaneous causality;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
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