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Present Value Relations, Granger Noncausality, And Var Stability

  • Fanelli, Luca

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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Article provided by Cambridge University Press in its journal Econometric Theory.

Volume (Year): 23 (2007)
Issue (Month): 06 (December)
Pages: 1254-1260

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Handle: RePEc:cup:etheor:v:23:y:2007:i:06:p:1254-1260_07
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  1. Engsted, Tom & Haldrup, Niels, 1994. "The Linear Quadratic Adjustment Cost Model and the Demand for Labour," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(S), pages S145-59, Suppl. De.
  2. Richard Meese, 1980. "Dynamic factor demand schedules for labor and capital under rational expectations," International Finance Discussion Papers 153, Board of Governors of the Federal Reserve System (U.S.).
  3. Thomas J. Sargent, 1978. "A note on maximum likelihood estimation of the rational expectations model of the term structure," Staff Report 26, Federal Reserve Bank of Minneapolis.
  4. 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, vol. 26(1), pages 117-139, January.
  5. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  6. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
  7. Luca Fanelli, 2006. "Dynamic adjustment cost models with forward-looking behaviour," Econometrics Journal, Royal Economic Society, vol. 9(1), pages 23-47, 03.
  8. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
  9. Geert Bekaert, 2001. "Expectations Hypotheses Tests," Journal of Finance, American Finance Association, vol. 56(4), pages 1357-1394, 08.
  10. Fanelli, Luca, 2006. "Multi-equational linear quadratic adjustment cost models with rational expectations and cointegration," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 445-456, March.
  11. Johansen, Soren & Swensen, Anders Rygh, 1999. "Testing exact rational expectations in cointegrated vector autoregressive models," Journal of Econometrics, Elsevier, vol. 93(1), pages 73-91, November.
  12. Timmermann, Allan, 1994. "Present value models with feedback : Solutions, stability, bubbles, and some empirical evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1093-1119, November.
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