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Disproving Causal Relationships Using Observational Data

  • Henry L. Bryant
  • David A. Bessler
  • Michael S. Haigh

Economic theory is replete with causal hypotheses that are scarcely tested because economists are generally constrained to work with observational data. This article describes the use of causal inference methods for testing a hypothesis that one random variable causes another. Contingent on a sufficiently strong correspondence between the hypothesized cause and effect, an appropriately related third variable can be employed for such a test. The procedure is intuitive, and is easy to implement. The basic logic of the procedure naturally suggests strong and weak grounds for rejecting the hypothesized causal relationship. Monte Carlo results suggest that weakly-grounded rejections are unreliable for small samples, but reasonably reliable for large samples. Strongly-grounded rejections are highly reliable, even for small samples.

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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 71 (2009)
Issue (Month): 3 (06)
Pages: 357-374

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Handle: RePEc:bla:obuest:v:71:y:2009:i:3:p:357-374
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  1. Kevin Hoover & Selva Demiralp & Stephen J. Perez, 2006. "A Bootstrap Method for Identifying and Evaluating a Structural Vector Autoregression," Working Papers 614, University of California, Davis, Department of Economics.
  2. Kevin Hoover & Selva Demiralp, 2003. "Searching for the Causal Structure of a Vector Autoregression," Working Papers 33, University of California, Davis, Department of Economics.
  3. Swanson, N.R. & Granger, C.W.J., 1994. "Impulse Response Functions Based on Causal Approach to Residual Orthogonalization in Vector Autoregressions," Papers 9-94-1, Pennsylvania State - Department of Economics.
  4. Hoover,Kevin D., 2001. "Causality in Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521002882.
  5. Peltzman, Sam, 1975. "The Effects of Automobile Safety Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 677-725, August.
  6. Hoover, Kevin D., 2005. "Automatic Inference Of The Contemporaneous Causal Order Of A System Of Equations," Econometric Theory, Cambridge University Press, vol. 21(01), pages 69-77, February.
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