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Granger Causality and Policy Ineffectiveness: A Rejoinder

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  • Buiter, Willem H.

Abstract

In an earlier paper "Granger-causality and Policy Effectiveness" Economica (1984), I showed that for a policy instrument x to Granger-cause some target variable y it is not necessary for x to be useful in controlling y. (The argument that it is not sufficient was already familiar, e.g. from the work of Sargent). Using a linear rational expectations model I showed that x would fail to Granger-cause y (while y did, in some cases, Granger-cause x) if x were set by a variety of optimal, time-consistent or ad hoc policy feedback rules. Yet in all the examples, x was an effective policy instrument. In response to some comments by Professor Granger, I now show that my earlier results are unaffected when the following 3 concessions to "realism" are made: 1. Controllers do not have perfect control of the instruments (this was already allowed for in my earlier paper). 2. Governments may use a different information set to determine instruments from that used by the public. 3. The controller may not have a perfectly specified or estimated model of the economy. The analysis confirms that Granger-causality tests are uninformative about the presence, absence, degree or kind of policy (in)effectiveness.

Suggested Citation

  • Buiter, Willem H., 1986. "Granger Causality and Policy Ineffectiveness: A Rejoinder," CEPR Discussion Papers 126, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:126
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    1. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-237, April.
    2. Buiter, Willem H, 1984. "Granger-Causality and Policy Effectiveness," Economica, London School of Economics and Political Science, vol. 51(202), pages 151-162, May.
    3. William Schwert, G., 1979. "Tests of causality : The message in the innovations," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 10(1), pages 55-96, January.
    4. Granger, C. W. J., 1980. "Testing for causality : A personal viewpoint," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 329-352, May.
    5. Buiter, Willem H., 1986. "Granger Causality and Policy Ineffectiveness: A Rejoinder," CEPR Discussion Papers 126, C.E.P.R. Discussion Papers.
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    1. Buiter, Willem H., 1986. "Granger Causality and Policy Ineffectiveness: A Rejoinder," CEPR Discussion Papers 126, C.E.P.R. Discussion Papers.

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