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Causation Delays and Causal Neutralization for General Horizons: The Money-Output Relationship Revisited

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  • Jonathan B. Hill

    (Florida International University)

Abstract

In this paper, we develop a parametric test procedure for multiple horizon "Granger" causality and apply the procedure to the well established problem of determining causal patterns in aggregate monthly U.S. money and output. As opposed to most papers in the parametric causality literature, we are interested in whether money ever "causes" (can ever be used to forecast) output, when causation occurs, and how (through which causal chains). Our tests are based on new recursive parametric characterizations of causality chains which help to distinguish between mere noncausation (the total absence of indirect causal routes) and causal neutralization, in which several causal routes exists that cancel each other out such that noncausation occurs. In many cases the recursive characterizations imply greatly simplified linear compound hypotheses for multi-step ahead causation, and permit Wald tests with the usual asymptotic ÷²-distribution. A simulation study demonstrates that a sequential test method does not generate the type of size distortions typically reported in the literature, and null rejection frequencies depend entirely on how we define the "null hypothesis" of non-causality (at which horizon, if any). Using monthly data employed in Stock and Watson (1989), and others, we demonstrate that while Friedman and Kuttner's (1993) result that detrended money growth fails to cause output one month ahead continues into the third quarter of 2003, a significant causal lag may exist through a variety of short-term interest rates: money appears to cause output after at least one month passes, although in some cases using recent data conflicting evidence suggests money may never cause output and be truly irrelevant in matters of real decisions.

Suggested Citation

  • Jonathan B. Hill, 2004. "Causation Delays and Causal Neutralization for General Horizons: The Money-Output Relationship Revisited," Econometrics 0402002, EconWPA, revised 23 Mar 2005.
  • Handle: RePEc:wpa:wuwpem:0402002
    Note: Type of Document - pdf; prepared on WinXP; pages: 40
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    References listed on IDEAS

    as
    1. Dufour, Jean-Marie & Pelletier, Denis & Renault, Eric, 2006. "Short run and long run causality in time series: inference," Journal of Econometrics, Elsevier, vol. 132(2), pages 337-362, June.
    2. Granger, C. W. J., 1980. "Long memory relationships and the aggregation of dynamic models," Journal of Econometrics, Elsevier, vol. 14(2), pages 227-238, October.
    3. Renault, E. & Szafarz, A., 1991. "True Versus Spurious Instantaneous Causality," Papers 9103, Universite Libre de Bruxelles - C.E.M.E..
    4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    5. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    6. Jean-Marie Dufour & Eric Renault, 1998. "Short Run and Long Run Causality in Time Series: Theory," Econometrica, Econometric Society, vol. 66(5), pages 1099-1126, September.
    7. Benjamin M. Friedman & Kenneth N. Kuttner, 1990. "Another look at the evidence on money-income casualty," Working Paper Series, Macroeconomic Issues 90-17, Federal Reserve Bank of Chicago.
    8. repec:cup:macdyn:v:5:y:2001:i:4:p:506-32 is not listed on IDEAS
    9. Dufour, Jean-Marie & Tessier, David, 1993. "On the relationship between impulse response analysis, innovation accounting and Granger causality," Economics Letters, Elsevier, vol. 42(4), pages 327-333.
    10. Swanson, Norman R., 1998. "Money and output viewed through a rolling window," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 455-474, May.
    11. James H. Stock & Mark W. Watson, 1987. "Interpreting Evidence on Money-Income Causality," NBER Working Papers 2228, National Bureau of Economic Research, Inc.
    12. Lütkepohl, Helmut & POSKITT, D.S., 1996. "Testing for Causation Using Infinite Order Vector Autoregressive Processes," Econometric Theory, Cambridge University Press, vol. 12(01), pages 61-87, March.
    13. Rothman, Philip & van Dijk, Dick & null, Philip Hans, 2001. "Multivariate Star Analysis Of Money Output Relationship," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 506-532, September.
    14. Feige, Edgar L & Pearce, Douglas K, 1979. "The Casual Causal Relationship between Money and Income: Some Caveats for Time Series Analysis," The Review of Economics and Statistics, MIT Press, vol. 61(4), pages 521-533, November.
    15. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    16. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-492, June.
    17. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-552, September.
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    More about this item

    Keywords

    multiple horizon causation; multivariate time series; sequential tests;

    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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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