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Finite-Sample Simulation-Based Inference in VAR Models with Applications to Order Selection and Causality Testing

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  • DUFOUR, Jean-Marie
  • JOUINI, Tarek

Abstract

Statistical tests in vector autoregressive (VAR) models are typically based on large-sample approximations, involving the use of asymptotic distributions or bootstrap techniques. After documenting that such methods can be very misleading even with fairly large samples, especially when the number of lags or the number of equations is not small, we propose a general simulation-based technique that allows one to control completely the level of tests in parametric VAR models. In particular, we show that maximized Monte Carlo tests [Dufour (2002)] can provide provably exact tests for such models, whether they are stationary or integrated. Applications to order selection and causality testing are considered as special cases. The technique developed is applied to quarterly and monthly VAR models of the U.S. economy, comprising income, money, interest rates and prices, over the period 1965-1996.

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Bibliographic Info

Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 16-2005.

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Length: 39 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:mtl:montec:16-2005

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Keywords: Vector autoregression; VAR; exact test; Monte Carlo test; maximized Monte Carlo test; bootstrap; Granger causality; order selection; nonstationary model; macroeconomics; money and income; interest rate; inflation;

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Citations

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Cited by:
  1. Jonathan B. Hill, 2004. "Efficient Tests of Long-Run Causation in Trivariate VAR Processes with a Rolling Window Study of the Money-Income Relationship," Working Papers 0413, Florida International University, Department of Economics.
  2. Jonathan B. Hill, 2004. "Causation Delays and Causal Neutralization: The Money-Output Relationship Revisited," Working Papers 0403, Florida International University, Department of Economics.
  3. Dufour, Jean-Marie, 2006. "Monte Carlo tests with nuisance parameters: A general approach to finite-sample inference and nonstandard asymptotics," Journal of Econometrics, Elsevier, vol. 133(2), pages 443-477, August.
  4. Jonathan B. Hill, 2005. "Causation Delays and Causal Neutralization up to Three Steps Ahead: The Money-Output Relationship Revisited," Econometrics 0503016, EconWPA, revised 23 Mar 2005.

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