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From Correlation to Granger Causality

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  • David I. Stern

    (Crawford School of Public Policy, The Australian National University Author-Email: david.stern@anu.edu.au)

Abstract

The paper focuses on establishing causation in regression analysis in observational settings. Simple static regression analysis cannot establish causality in the absence of a priori theory on possible causal mechanisms or controlled and randomized experiments. However, two regression based econometric techniques - instrumental variables and Granger causality - can be used to test for causality given some assumptions. The Granger causality technique is applied to a time series data set on energy and economic growth from Sweden spanning 150 years to determine whether increases in energy use and energy quality have driven economic growth. I show that the Granger causality technique is very sensitive to variable definition, choice of additional variables in the model, and sample periods. Better results can be obtained by using multivariate models, defining variables to better reflect their theoretical definition, and by using larger samples. The better specified models with larger samples are more likely to show that energy causes output growth but it is also possible that the relationship between energy and growth has changed over time. Energy prices have a significant causal impact on both energy use and output while there is no strong evidence that energy use causes carbon and sulfur emissions despite the obvious physical relationship.

Suggested Citation

  • David I. Stern, 2011. "From Correlation to Granger Causality," Crawford School Research Papers 1113, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:crwfrp:1113
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    File URL: http://www.crawford.anu.edu.au/pdf/crwf_ssrn/crwfrp_1113.pdf
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Blunt Instruments
      by David Stern in Stochastic Trend on 2013-12-02 16:05:00
    2. Casuality between Energy and Output in the Long-Run
      by David Stern in Stochastic Trend on 2013-01-21 06:51:00
    3. Meta-Analysis of Energy-GDP Causality Literature
      by David Stern in Stochastic Trend on 2012-04-06 11:20:00
    4. Crawford School Working Papers in February 2012
      by David Stern in Stochastic Trend on 2012-03-02 16:26:00
    5. Crawford School Working Papers in January 2012
      by David Stern in Stochastic Trend on 2012-02-03 00:03:00
    6. Crawford School Working Papers in December 2011
      by David Stern in Stochastic Trend on 2012-01-03 06:04:00
    7. From Correlation to Granger Causality Added to New Crawford School Research Papers Series
      by David Stern in Stochastic Trend on 2011-11-17 03:45:00
    8. Granger Causality
      by Clive Jones in Business Forecasting on 2014-02-12 00:19:57

    Citations

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    Cited by:

    1. Stern, David I. & Enflo, Kerstin, 2013. "Causality between energy and output in the long-run," Energy Economics, Elsevier, vol. 39(C), pages 135-146.
    2. repec:spr:jbecon:v:88:y:2018:i:2:d:10.1007_s11573-017-0873-5 is not listed on IDEAS
    3. Fizaine, Florian, 2015. "Minor metals and organized markets: News highlights about the consequences of establishing a futures market in a thin market with a dual trading price system," Resources Policy, Elsevier, vol. 46(P2), pages 59-70.

    More about this item

    Keywords

    causality; energy; economic growth;

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • 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
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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