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Markov switching causality and the money-output relationship

Author

Listed:
  • Morten O. Ravn
  • Zacharias Psaradakis

    (School of Economics, Mathematics & Statistics, Birkbeck College, University of London, UK)

  • Martin Sola

Abstract

The causal link between monetary variables and output is one of the most studied issues in macroeconomics. One puzzle from this literature is that the results of causality tests appear to be sensitive with respect to the sample period that one considers. As a way of overcoming this difficulty, we propose a method for analysing Granger causality which is based on a vector autoregressive model with time-varying parameters. We model parameter time-variation so as to reflect changes in Granger causality, and assume that these changes are stochastic and governed by an unobservable Markov chain. When applied to US data, our methodology allows us to reconcile previous puzzling differences in the outcome of conventional tests for money-output causality. Copyright © 2005 John Wiley & Sons, Ltd.

Suggested Citation

  • Morten O. Ravn & Zacharias Psaradakis & Martin Sola, 2005. "Markov switching causality and the money-output relationship," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(5), pages 665-683.
  • Handle: RePEc:jae:japmet:v:20:y:2005:i:5:p:665-683
    DOI: 10.1002/jae.819
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    References listed on IDEAS

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    1. Romano, Joseph P & Wolf, Michael, 2001. "Subsampling Intervals in Autoregressive Models with Linear Time Trend," Econometrica, Econometric Society, vol. 69(5), pages 1283-1314, September.
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    3. Christiano, Lawrence J. & Ljungqvist, Lars, 1988. "Money does Granger-cause output in the bivariate money-output relation," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 217-235, September.
    4. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
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    8. Sola, Martin & Driffill, John, 1994. "Testing the term structure of interest rates using a stationary vector autoregression with regime switching," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 601-628.
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    12. Krol, Robert & Ohanian, Lee E., 1990. "The impact of stochastic and deterministic trends on money-output causality : A multi-country investigation," Journal of Econometrics, Elsevier, vol. 45(3), pages 291-308.
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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