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Present value relations, Granger non-causality and VAR stability

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  • Fanelli, Luca

Abstract

When in "exact" present value (PV) relations the decision variables do not Granger cause the explanatory variables and a VAR process is used to derive restrictions, the system embodies explosive roots. Hence any test of the PV restrictions would reject the null if the system incorporates Granger non-causality constraints. This paper investigates the issue.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1642.

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Date of creation: Dec 2006
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Handle: RePEc:pra:mprapa:1642

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Keywords: Granger non causality; Present value model; VAR;

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  1. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 520-30, June.
  2. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
  3. Meese, Richard, 1980. "Dynamic factor demand schedules for labor and capital under rational expectations," Journal of Econometrics, Elsevier, Elsevier, vol. 14(1), pages 141-158, September.
  4. Timmermann, Allan, 1994. "Present value models with feedback : Solutions, stability, bubbles, and some empirical evidence," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 18(6), pages 1093-1119, November.
  5. Geert Bekaert & Robert J. Hodrick, 2000. "Expectations Hypotheses Tests," NBER Working Papers 7609, National Bureau of Economic Research, Inc.
  6. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  7. Fanelli, Luca, 2002. "A new approach for estimating and testing the linear quadratic adjustment cost model under rational expectations and I(1) variables," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 26(1), pages 117-139, January.
  8. Sargent, Thomas J., 1979. "A note on maximum likelihood estimation of the rational expectations model of the term structure," Journal of Monetary Economics, Elsevier, Elsevier, vol. 5(1), pages 133-143, January.
  9. Johansen, Soren & Swensen, Anders Rygh, 1999. "Testing exact rational expectations in cointegrated vector autoregressive models," Journal of Econometrics, Elsevier, Elsevier, vol. 93(1), pages 73-91, November.
  10. Fanelli, Luca, 2006. "Multi-equational linear quadratic adjustment cost models with rational expectations and cointegration," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(3), pages 445-456, March.
  11. Luca Fanelli, 2006. "Dynamic adjustment cost models with forward-looking behaviour," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 9(1), pages 23-47, 03.
  12. Engsted, Tom & Haldrup, Niels, 1994. "The Linear Quadratic Adjustment Cost Model and the Demand for Labour," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 9(S), pages S145-59, Suppl. De.
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Cited by:
  1. Peter C.B. Phillips & Tassos Magdalinos, 2011. "Inconsistent VAR Regression with Common Explosive Roots," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1777, Cowles Foundation for Research in Economics, Yale University.

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