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Pitfalls in using Granger causality tests to find an engine of growth

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  • Hsiu-Yun Lee
  • Kenneth Lin
  • Jyh-Lin Wu

Abstract

This paper discusses the reliability of using a Granger causality test to find an engine of growth. The paper first focuses on growth models' cointegration implications since causality must exist in an error-correction model. As a complementary, Monte Carlo experiments with independently generated I(1) variables also indicate a significant probability for rejecting the Granger non-causality null. Given the persistency and cointegration of variables in growth models, rejecting the non-causality null may reflect a spurious causal relationship, rather than confirm a theoretical causality.

Suggested Citation

  • Hsiu-Yun Lee & Kenneth Lin & Jyh-Lin Wu, 2002. "Pitfalls in using Granger causality tests to find an engine of growth," Applied Economics Letters, Taylor & Francis Journals, vol. 9(6), pages 411-414.
  • Handle: RePEc:taf:apeclt:v:9:y:2002:i:6:p:411-414
    DOI: 10.1080/13504850110088132
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    Cited by:

    1. Angeliki Papana & Catherine Kyrtsou & Dimitris Kugiumtzis & Cees Diks, 2016. "Detecting Causality in Non-stationary Time Series Using Partial Symbolic Transfer Entropy: Evidence in Financial Data," Computational Economics, Springer;Society for Computational Economics, vol. 47(3), pages 341-365, March.
    2. Paolo Guarda & Abdelaziz Rouabah, 2015. "Is the financial sector Luxembourg?s engine of growth?," BCL working papers 97, Central Bank of Luxembourg.
    3. Mariusz Maziarz, 2015. "A review of the Granger-causality fallacy," The Journal of Philosophical Economics, Bucharest Academy of Economic Studies, The Journal of Philosophical Economics, vol. 8(2), May.
    4. R. Scott Hacker & Abdulnasser Hatemi-J, 2006. "Tests for causality between integrated variables using asymptotic and bootstrap distributions: theory and application," Applied Economics, Taylor & Francis Journals, vol. 38(13), pages 1489-1500.
    5. Tang, Chor Foon, 2009. "Does causality technique matter to savings-growth nexus in Malaysia?," MPRA Paper 38535, University Library of Munich, Germany.

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