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Granger-Causality in the presence of structural breaks

  • Daniel Ventosa-Santaulària

    ()

    (Universidad de Guanajuato)

  • José Eduardo Vera-Valdés

    ()

    (Universidad de Guanajuato)

The concept of Granger-Causality (GC) is widely used to draw inference concerning causality in applied economics. Stationary series are the term of reference used in GC testing, which is generally studied by means of a standard Dickey-Fuller test. We prove that, when the Data Generating Process (DGP) of the variables is either Broken-Trend Stationary (BTS) or Broken-Mean Stationary (BMS), correct inference can not be drawn from a standard Granger-Causality test and may identify inexistent causal relationships, even if the former variables are differenced. Asymptotic and finite-sample evidence in this sense is provided.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 3 (2008)
Issue (Month): 61 ()
Pages: 1-14

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Handle: RePEc:ebl:ecbull:eb-08c20013
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  1. Foresti, Pasquale, 2006. "Testing for Granger causality between stock prices and economic growth," MPRA Paper 2962, University Library of Munich, Germany, revised 2007.
  2. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  3. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  4. Vogelsang, T.I. & Perron, P., 1991. "Nonstationary and Level Shifts With An Application To Purchasing Power Parity," Papers 359, Princeton, Department of Economics - Econometric Research Program.
  5. Hayo, Bernd, 1998. "Money-output Granger causality revisited: An empirical analysis of EU countries," ZEI Working Papers B 08-1998, ZEI - Center for European Integration Studies, University of Bonn.
  6. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
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  9. McCrorie, J.R. & Chambers, M.J., 2004. "Granger Causality and the Sampling of Economic Processes," Discussion Paper 2004-39, Tilburg University, Center for Economic Research.
  10. Ventosa-Santaularària, Daniel & Gómez, Manuel, 2006. "Inflation and Breaks: the validity of the Dickey-Fuller test," MPRA Paper 58773, University Library of Munich, Germany.
  11. repec:ebl:ecbull:v:3:y:2005:i:47:p:1-13 is not listed on IDEAS
  12. Andersson, Jonas, 2004. "Testing for Granger causality in the presence of measurement errors," Discussion Papers 2004/11, Department of Business and Management Science, Norwegian School of Economics.
  13. Mehl, Arnaud, 2000. "Unit root tests with double trend breaks and the 1990s recession in Japan," Japan and the World Economy, Elsevier, vol. 12(4), pages 363-379, December.
  14. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
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