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Effects of simultaneity on testing Granger-causality – a cautionary note about statistical problems and economic misinterpretations

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Abstract

Interpreting Granger causality as economic causality implies that the underlying VAR model is a structural economic model. However, this is wrong if simultaneity occurs. Magnitude and stability of possible errors are analysed in a simulation study. It is shown that economic misinterpretations of tests of Granger causality can occur with probability one for realistic parameter values. Furthermore, the power of the test can be rather low even with a sample size of T=50.

Suggested Citation

  • Joachim Wilde, 2012. "Effects of simultaneity on testing Granger-causality – a cautionary note about statistical problems and economic misinterpretations," IEER Working Papers 93, Institute of Empirical Economic Research, Osnabrueck University.
  • Handle: RePEc:iee:wpaper:wp0093
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    1. Some Recent Papers on Granger Causality
      by Dave Giles in Econometrics Beat: Dave Giles' Blog on 2012-12-03 00:30:00

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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. Naser, Hanan, 2014. "On the cointegration and causality between Oil market, Nuclear Energy Consumption, and Economic Growth: Evidence from Developed Countries," MPRA Paper 65252, University Library of Munich, Germany, revised 25 Mar 2015.
    3. David Stern & Robert Kaufmann, 2014. "Anthropogenic and natural causes of climate change," Climatic Change, Springer, vol. 122(1), pages 257-269, January.

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    More about this item

    Keywords

    Granger causality; test; simultaneity; instantaneous causality;
    All these keywords.

    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

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