Efficient tests of long‐run causation in trivariate VAR processes with a rolling window study of the money–income relationship

Jonathan B. Hill

58 citations0/0 files storedJournal of Applied Econometrics

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Monetary Policy and Economic Impact Market Dynamics and Volatility Economic theories and models

Abstract

Abstract 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. Copyright © 2007 John Wiley & Sons, Ltd.

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References

1969Investigating Causal Relations by Econometric Models and Cross-spectral Methods 1980Macroeconomics and Reality 1995Statistical inference in vector autoregressions with possibly integrated processes 1993A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems 2010Investigating Causal Relations by Econometric Models and Cross-Spectral Methods 1972MONEY, INCOME, AND CAUSALITY 1988Some recent development in a concept of causality 1990Inference in Linear Time Series Models with some Unit Roots

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