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Efficient Tests of Long-Run Causation in Trivariate VAR Processes with a Rolling Window Study of the Money-Income Relationship

  • Jonathan B. Hill

    (Florida International University)

This paper develops a simple sequential multiple horizon non-causation test strategy for trivariate VAR models (with one auxiliary variable). We apply the test strategy to a rolling window study of money supply and real income, with the price of oil, the unemployment rate and the spread between the Treasury bill and commercial paper rates as auxiliary processes. Ours is the first study to control simultaneously for common stochastic trends, sensitivity of test statistics to the chosen sample period, null hypothesis over-rejection, sequential test size bounds, and the possibility of causal delays. Evidence suggests highly significant direct or indirect causality from M1 to real income, in particular through the unemployment rate and M2 once we control for cointegration.

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File URL: http://econwpa.repec.org/eps/mac/papers/0407/0407013.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0407013.

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Length: 51 pages
Date of creation: 15 Jul 2004
Date of revision: 17 May 2005
Handle: RePEc:wpa:wuwpma:0407013
Note: Type of Document - pdf; pages: 51
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Dufour, J.M. & Renault, E., 1995. "Short-Run and Long-Rub Causality in Time Series: Theory," Cahiers de recherche 9538, Universite de Montreal, Departement de sciences economiques.
  2. Hiro Y. Toda & Peter C.B. Phillips, 1991. "Vector Autoregression and Causality," Cowles Foundation Discussion Papers 977, Cowles Foundation for Research in Economics, Yale University.
  3. Thoma, Mark A., 1994. "Subsample instability and asymmetries in money-income causality," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 279-306.
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  7. Boudjellaba, H. & Dufour, J.M. & Roy, R., 1992. "Simplified Conditions for Non-Causality Between Vectors in Multivariate Arma Models," Cahiers de recherche 9236, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  8. Stock, James H. & Watson, Mark W., 1989. "Interpreting the evidence on money-income causality," Journal of Econometrics, Elsevier, vol. 40(1), pages 161-181, January.
  9. Caporale, Guglielmo Maria & Pittis, Nikitas & Spagnolo, Nicola, 2002. "Testing for Causality-in-Variance: An Application to the East Asian Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(3), pages 235-45, July.
  10. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
  11. Phillip Rothman & Dick van Dijk & Philip Hans Franses, 2000. "A Multivariate STAR Analysis of the Relationship Between Money and Output," Working Papers 0012, East Carolina University, Department of Economics.
  12. Christiano, Lawrence J. & Ljungqvist, Lars, 1988. "Money does Granger-cause output in the bivariate money-output relation," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 217-235, September.
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  14. Jean-Marie Dufour & Tarek Jouini, 2005. "Finite-Sample Simulation-Based Inference in VAR Models with Applications to Order Selection and Causality Testing," CIRANO Working Papers 2005s-26, CIRANO.
  15. Patrick J. Coe & James M. Nason, 2004. "Long-run monetary neutrality and long-horizon regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(3), pages 355-373.
  16. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
  17. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
  18. 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.
  19. Renault, E. & Szafarz, A., 1991. "True Versus Spurious Instantaneous Causality," Papers 9103, Universite Libre de Bruxelles - C.E.M.E..
  20. Swanson, Norman R., 1998. "Money and output viewed through a rolling window," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 455-474, May.
  21. Norman R. Swanson & Jeffery D. Amato, 2000. "The real-time predictive content of money for output," BIS Working Papers 96, Bank for International Settlements.
  22. 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.
  23. Boudjellaba, B. & Dufour, J.M. & Roy, R., 1991. "Testing Causality Between Two Vectors in Multivariate Arma Models," Cahiers de recherche 9119, Universite de Montreal, Departement de sciences economiques.
  24. 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.
  25. Hong, Yongmiao, 2001. "A test for volatility spillover with application to exchange rates," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 183-224, July.
  26. Swanson, N.R. & Ozyildirim, A. & Pisu, M., 1996. "A Comparison of Alternatove causality and Predictive Accuracy Tests in the presence of Integrated and Co-integrated Economic Variables," Papers 4-96-4, Pennsylvania State - Department of Economics.
  27. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
  28. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  29. 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.
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