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Testing for Granger (non)-Causality in a Time Varying Coefficient VAR Model

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  • Dimitris K. Christopoulos
  • Miguel Leon-Ledesma

    ()

Abstract

In this paper we propose Granger (non-)causality tests based on a VAR model allowing for time-varying coefficients. The functional form of the time-varying coefficients is a Logistic Smooth Transition Autoregressive (LSTAR) model using time as the transition variable. The model allows for testing Granger non-causality when the VAR is subject to a smooth break in the coefficients of the Granger causal variables. The proposed test then is applied to the money-output relationship using quarterly US data for the period 1952:2-2002:4. We find that causality from money to output becomes stronger after 1978:4 and the model is shown to have a good out of sample forecasting performance for output relative to a linear VAR model.

Suggested Citation

  • Dimitris K. Christopoulos & Miguel Leon-Ledesma, 2008. "Testing for Granger (non)-Causality in a Time Varying Coefficient VAR Model," Studies in Economics 0802, School of Economics, University of Kent.
  • Handle: RePEc:ukc:ukcedp:0802
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    2. Wang, Xia & Zheng, Tingguo & Zhu, Yanli, 2014. "Money–output Granger causal dynamics in China," Economic Modelling, Elsevier, vol. 43(C), pages 192-200.
    3. Lu, Feng-bin & Hong, Yong-miao & Wang, Shou-yang & Lai, Kin-keung & Liu, John, 2014. "Time-varying Granger causality tests for applications in global crude oil markets," Energy Economics, Elsevier, vol. 42(C), pages 289-298.
    4. Matthieu Droumaguet & Tomasz Wozniak, 2012. "Bayesian Testing of Granger Causality in Markov-Switching VARs," Economics Working Papers ECO2012/06, European University Institute.
    5. Konstantinos Chatzimichael & Dimitris Christopoulos & Spyro Stefanou & Vangelis Tzouvelekas, 2015. "Irrigation Technology Adoption, Water Effectiveness and Productivity Measurement," Working Papers 1506, University of Crete, Department of Economics.
    6. Matthieu Droumaguet & Anders Warne & Tomasz Wozniak, 2015. "Granger Causality and Regime Inference in Bayesian Markov-Switching VARs," Department of Economics - Working Papers Series 1191, The University of Melbourne.
    7. Konstantinos Chatzimichael & Dimitris Christopoulos & Spiro Stefanou & Vangelis Tzouvelekas, 2017. "Irrigation Practices, Water Effectiveness and Productivity Measurement," Working Papers 1702, University of Crete, Department of Economics.

    More about this item

    Keywords

    Granger causality; Time-varying coefficients; LSTAR models;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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